Goldman Sachs shareholders pull no punches

[Ognir]

http://business.timesonline.co.uk/tol/b ... 115251.ece

Shareholders hammered the board and top executives of Goldman Sachs for gross mismanagement of the beleaguered bank, accusing them of lying about damaging fraud charges and unjustly enriching themselves at investors' expense, in a series of legal actions revealed yesterday.

In a filing to the US Securities and Exchange Commission, Goldman said that lawsuits started pouring in on April 22, six days after the Wall Street bank and one of its traders were charged by the SEC over the sale of a synthetic collateralised debt obligation called Abacus that lost two investors $1 billion.

The bank, which also faces investigations by the Department of Justice and the New York attorney-general over the 2007 Abacus transactions, admitted that its legal difficulties were likely to worsen.

"[Goldman Sachs] anticipates that additional putative shareholder derivative actions and other limitation may be filed, and regulatory and other investigations and actions commenced with respect to [CDOs]," the bank wrote in its filing.

Shareholders are furious about the $21 billion (£13.8 billion) wiped from Goldman's value since the surprise fraud charges were filed last month. Goldman had not told investors that it received a Wells notice from the SEC in July 2009, warning that charges over Abacus were likely. Although Goldman said in its 2009 year-end filing to the SEC that it had received "requests for information" from regulators about CDOs, the bank chose to "mislead the public" by not mentioning the Wells notice, one legal action alleged.

The shareholders' claims are scathing of Lloyd Blankfein, the chairman and chief executive of the bank, and Gary Cohen, the president, and the rest of the bank's 12-strong board, which they said was made up of individuals too interested in their "grossly excessive" compensation and too closely connected to each other to run the bank properly. "The director defendants completely abdicated their oversight duties to the company," one lawsuit said.

Instead, the bank's leaders sold $65.4 million of "artificially inflated" Goldman stock while they — but not other shareholders — knew of the SEC's impending charges, the legal action alleged. Goldman's credibility had been "devastated" and its corporate image and goodwill "irreparably damaged" by the charges, shareholders asserted.

"For at least the foreseeable future, Goldman will suffer from what is known as the 'liar's discount', a term applied to the stocks of companies who have been implicated in illegal behaviour and have misled the investing public," one suit said.

Shareholders want Goldman Sachs to pay them damages and make corporate governance reforms. Mr Blankfein went on a public relations offensive at the weekend, doing an interview on The Charlie Rose Show in which he acknowledged that the bank, which is overhauling its internal rules for dealing with clients, "can't exist in the current state that we are in". He added: "We have a lot of work to do."

Warren Buffett, the renowned investor who loaned Goldman $5 billion during the financial crisis in return for an annual return of $500 million, tried to boost the bank's image at his shareholders' meeting in Omaha, Nebraska, at the weekend.

"I don't hold against Goldman Sachs the fact that an allegation's been made by the SEC," he said. "If it leads to something more serious, then we'll think about it if it happens."

Mr Buffett did not convince at least some of his own shareholders. "I hope they nail Goldman," John Buckley, an Omaha native, told The Times. "It ain't right, doing that to people."

Shares in Goldman Sachs dropped by 9.4 per cent last Friday after the bank was downgraded by two analysts who cited the difficulty of predicting the outcome of the bank's legal problems. The stock made a comparatively small rebound yesterday, rising by $4.37, or 3 per cent, to close at $149.57.

Jeff Harte, a Sandler O'Neill banking analyst, reiterated his "buy" rating on Goldman Sachs, saying that the stock was oversold.