Saturday, April 17, 2010

Goldman Sachs hid fraud investigation from shareholders

As covered in the last post, "Goldman Sachs' "doing God's work" apparently includes fraud" Goldman Sachs was sued yesterday by the SEC for fraud. The lawsuit itself--and more aptly, what Goldman knew about the investigation--is bringing to the surface even more questions, and this time they aren't coming from Goldman clients, but instead, Goldman shareholders. It appears that on top of the fraud detailed in the SEC complaint, Goldman Sachs might very well have even been breaking the law yet again.

What is the crime? Well, despite the fact that the firm was informed that it was under investigation and warned of such by the SEC last July, Goldman has yet to mention any of that its to shareholders or disclose it in its company reports! A slew of SEC regulations require that publicly-traded companies disclose pertinent information--and SEC investigations certainly qualify as pertinent. Goldman had some 9 months to disclose this important information to its shareholders, and simply did not. As a result, Goldman shareholders took a 13% hit on Friday as the stock dropped upon news of the lawsuit, reducing the firms value by $10 Billion. As you can imagine, Goldman shareholders were as surprised as anyone else: while Goldman and the entire group of Goldman executives were warned by the SEC of this investigation and intent to sue last year, they just, well, seemed to have forgotten to mention it. Wow, I'd never expect that some a firm accused of $1 Billion worth of fraud--just shocking behavior.

Actually, its more likely calculating behavior. I just did a quick google search using the phrase "
discloses SEC investigation," and the very first page had headlines listing companies including Dell, SpongeTech, Bidz.com, Aetna, MicroStrageties, Terex, AETE and a number of others, each announcing the fact that they were under SEC investigation for various reasons--announcing this because it's required by law. Publicly-traded companies can get sued by shareholders or the SEC for failing to disclose pertinent information. Yet, as this Bloomberg article notes, Goldman Sachs received notice from the SEC last year, and made no mention whatsoever to its shareholders that the firm was under investigation by the SEC for fraud.

It would have been difficult for an investor to positively ascertain what Goldman already knew if that shareholder trusted the firm's SEC filings. As I mentioned in the first post, this lawsuit was speculated about for some time, but not confirmed until Friday. Shareholders inspecting Goldman's releases, statements, and report would have found no mention of it whatsoever. You can check out the firm's last
SEC form 10-K (pdf, 411 pages) for yourself. The section most relevant to the current scandal is tukced under the section titled "Risk Factors", subsection "Item 3: Legal Proceedings," which starts on pg 40 of the document (which is pdf pg 42). More precisely, what is relevant is that information which isn't there.

Check it out: you'll see that, according to Goldman itself, the firm is listed as a defendant in no less than 22 specific cases, and several more where the firm simply states that it is listed either in a "variety of lawsuits" or a "number of lawsuits." The specific actions include cases going back to Enron, eToys, and Refco, and more recenlty include suits regarding Washington Mutual, Fannie Mae, IndyMac, Montana Power, and even the City of Cleveland, which is suing Goldman directly. No mention of any SEC investigations for fraud are made whatsoever. In fact, the only possible phrase in the last 10-K that could even remotely be interpreted as a disclosure of any kind comes in the following perfectly couched language, under the heading "Mortgage Related Matters" (pg 47/pdf pg 49):

“GS&Co. and certain of its affiliates, together with other financial services firms, have received requests for information from various governmental agencies and self-regulatory organizations relating to subprime mortgages, and securitizations, collateralized debt obligations and synthetic products related to subprime mortgages. GS&Co. and its affiliates are cooperating with the requests.”

Okay, let me carefully double check, here: GS&Co. and certain...blah, blah, blah...nope, I don't see "investigation," "SEC," or "fraud" anywhere in that statement! As former SEC lawyer/law professor Adam Pritchard states in the
Bloomberg article, “The question is whether a general disclaimer like that is rendered misleading because you left out the specifics,” . . . “The prudent, conservative choice is to disclose more,” because omissions can lead to shareholder lawsuits, Pritchard said." Indeed, not to mention SEC lawsuits. The SEC will have its hands full with its current swing at Goldman, so a follow up by the SEC on these omissions will likely come much later, if it comes at all. If Goldman shares take more 13% single-day hits, its much more likely that shareholders will be first downtown to file suit.

And therein lies is a bit of irony: all things considered, Goldman shareholders are the beneficiaries of the often fraudulent and unethical "legalized" counterfeiting practices in which Goldman Sachs engages. They are the beneficiaries of the $24 Billion in bail-out dough Goldman received. They are the beneficiaries of the likely $4 Billion first-quarter profit to be announced soon. And as the saying goes, if you dance with the devil, except to get burned. I have no sympathy for Goldman shareholders because I would never in a million years support a group like that. I don't do dancing with the devil, thank you very much. But that's just my opinion, and that does notmmean that Goldman shareholders are not entitled to the same SEC-assured protections as everyone else is--because they are. Also, it certainly does not mean that Goldman can disregard the law--because it can't. Its just a little ironic, in my opinion. That's all. I'm just surprised that shareholders would expect a company like Goldman to be honest with them in the first place. Perhaps the SEC fraud case will bring some of those shareholders to the light, and they'll start to consider whether compromising themselves through Goldman Sachs is really worth it.

Okay, okay, you're right--FAT CHANCE.

More coverage on the Goldman fraud case to come!

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