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US Securities and Exchange Commission

Investors Urge Supreme Court Not to Roll Back Their Rights

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

As the U.S. Supreme Court is hearing oral arguments on a case that dates back to the 2008 financial crisis on March 29, 2021, over three dozen investor advocates are urging the high court to hold up their rights and protection against corporate misconduct and allow a class action suit against Goldman Sachs Group Inc. to proceed.

The case, Arkansas Teacher Retirement System v. Goldman Sachs Group Inc., “has potentially far-reaching and devastating implications” for investors and market integrity, according to a statement from 38 groups and individuals, which include the American Federation of State, County and Municipal Employees (AFSCME), the Consumer Federation of America, and Public Justice.

At issue is Goldman Sachs’s certain undisclosed conflict-of-interest trades, even as it assured investors that it had “extensive procedures and controls that are designed to identify and address conflicts of interest” and that “our clients’ interests always come first.” And the case relates to an enforcement action the SEC took against the investment firm. In July 2010, Goldmans Sachs agreed to pay $550 million in penalties and reform its business practices to settle SEC charges.

Over 10 years ago, those who bought the investment bank’s stocks in the early days of the financial crisis filed a class action suit, alleging that they unwittingly bought stocks that were artificially inflated because of Goldman Sachs’s statements regarding its high standards of conduct and protections against conflicts of interest.

The shareholders alleged that Goldman Sachs was profiting from the creation of a complex mortgage-backed security known as a collateralized debt obligation (CDO) backed by subprime mortgages that the firm knew were likely to fail.

In one instance, Goldman Sachs allegedly worked with one favored hedge fund customer, who was planning to short a particular CDO to maximize its chances of failure. Then, Goldman Sachs allegedly turned around and sold that CDO to other unsuspecting customers without warning them it had been designed to fail.

Moreover, investors said Goldman Sachs’s internal proprietary trading desk followed those funds with large bets against those mortgages to make a $4 billion profit.

Goldman Sachs’s executives knew there was a problem and began selling their own shares at a fast pace in 2007 before the news broke, investors said, citing internal emails.

When such practices finally came to light, its stock price plummeted and investors suffered massive financial loss, shareholders claimed. Some of those shareholders, led by the Arkansas Teachers Retirement System, tried to file a class action lawsuit to recoup their losses. But Goldman Sachs is trying prevent the suit from going forward.

“As Goldman continues to try and evade accountability by fighting against the class action moving forward, the issue before the Supreme Court is not whether the investors should ultimately prevail, but simply whether the investors will even be allowed the opportunity to have their arguments heard,” the 38 investor groups and individuals said in the statement.

Goldman Sachs did not immediately respond to a request for comment.

Barbara Roper, director of investor protection of the Consumer Federation of America, during a news conference on March 18, emphasized the enforcement actions the SEC and the Department of Justice took more than a decade ago.

“Despite that fact, Goldman is asking the Supreme Court to conclude that its disclosures, which led directly to investor losses, were too generic to permit those investors to recover their losses in court, she said. “But such a maneuver, if allowed to go unchallenged by the Court, would let companies off the leash, ushering in a wide range of misleading behavior that could materially harm U.S. investors.”

Former SEC chief accountant Lynn Turner pointed out that Congress recognized that securities markets incorporate publicly available information into their pricing from the inception of the federal securities laws.

“Congressional regulation thus targets the manipulation of securities prices through false or misleading statements and omissions,” he said. “Recent history illustrates the wisdom of these principles and the dramatic and destructive impact that false or misleading statements or omissions can have on markets and investor confidence.”

In the meantime, several former SEC officials including chairs William Donaldson and Arthur Levitt filed an amicus brief on March 3 in support of investor rights. Others include former commissioners Luis Aguilar, Kara Stein, Robert Jackson, as well as Turner who served under Levitt.

 

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