The nightmare of the 2007-2008 crisis has not freed everyone from its clutches. In 2021, Goldman Sachs faces Arkansas Teacher Retirement System and other plaintiffs in the legal proceedings in the US Supreme Court. To understand the basis of the current case, we need to re-visit Goldman Sachs’ Abacus investments from 2007.
Abacus
Before the 2007 financial global crisis, there was a sub-prime mortgage crisis. It was triggered by a decline in house prices caused by a collapse of a housing bubble. The same housing bubble was financed by mortgage-backed securities and collateralised debt obligations. Abacus was a synthetic collateralised debt obligation marketed by Goldman Sachs during that time.
The real problem was Abacus 2007 AC-1, which was assembled with help from hedge fund manager John Paulson. Paulson’s hedge fund, Paulson & Co., had placed enormous bets on Abacus’ failure. This fact was not disclosed to Goldman Sachs‘ clients. As the housing crisis happened, Paulson made $1bn while Goldman Sachs’ clients lost a similar amount.
In 2010, Goldman Sachs paid $500m to the Securities and Exchange Commission to settle fraud charges. Goldman acknowledged in the settlement that its marketing materials contained incomplete information.
Goldman Sachs v. Arkansas Teacher Retirement System
In the current case, Goldman Sachs is challenged by Arkansas Teacher Retirement System, West Virginia Investment Management Board and others. Shareholders claim they lost about $13bn as a result of the 2010 SEC fraud investigation. They argue that Goldman Sachs misled them with statements about honesty and integrity.
They also claim these statements kept the prices of stocks artificially high. On the other side, Goldman argues that such statements are immaterial to investors as they are too vague and generic. Furthermore, they believe that these did not affect the stock prices at all.
The case would try to answer the following questions :
1.) May a defendant in a securities class action rebut the presumption of class-wide reliance recognized in Basic Inc. v. Levinson by pointing to the generic nature of the alleged misstatements in showing that the statements had no impact on the price of the security?
2.) Does a defendant seek to rebut the basic presumption have only a burden of production or also the ultimate burden of persuasion?
Implications
This case has major implications for shareholders seeking to bring securities fraud lawsuits. Judges will determine when shareholders can collectively sue publicly traded companies for fraudulent statements that keep their stock prices artificially high.
Additionally, it is said that the suing investors have partial support from President Joe Biden’s administration and the SEC. It will be the test for the Supreme Court elected during Trump’s presidency.
Possible Outcomes
If Goldman Sachs lost the case, shareholders bringing similar securities fraud cases in the future would be able to cite vague, loose statement all companies make. This could potentially affect companies making statements promoting diversity/inclusivity in the workplace. They would stay silent to avoid proceedings in the future.
If Goldman Sachs won, companies would get away with no real consequences. They would keep promoting misleading statements which could hurt investors.
However, companies should not make such statements just ‘for show’ and Goldman Sachs should be held accountable for not being financially transparent. After all, they concealed the conflict of interests in the very beginning.
The third way is to reach the middle ground. As Adam Pritchett commented, “they will not do anything useful. Part of the problem is that the case focuses on “trivial, procedural questions” that the justices, with little expertise in securities law, won’t fully comprehend.
Conclusion
With the woke culture among companies, focused on promoting diversity and inclusion, it would be interesting to see what would happen if the companies were held accountable for making such statements.
It is up to the Supreme Court to decide and, regardless of which side of the barricade you are, the Goldman Sachs v. Arkansas Teacher Retirement System will impact the investors-led securities fraud cases in the future.
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