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8-K - FORM 8-K - GOLDMAN SACHS GROUP INC | y84170e8vk.htm |
EX-99.6 - EX-99.6 - GOLDMAN SACHS GROUP INC | y84170exv99w6.htm |
EX-99.7 - EX-99.7 - GOLDMAN SACHS GROUP INC | y84170exv99w7.htm |
EX-99.3 - EX-99.3 - GOLDMAN SACHS GROUP INC | y84170exv99w3.htm |
EX-99.2 - EX-99.2 - GOLDMAN SACHS GROUP INC | y84170exv99w2.htm |
EX-99.1 - EX-99.1 - GOLDMAN SACHS GROUP INC | y84170exv99w1.htm |
EX-99.4 - EX-99.4 - GOLDMAN SACHS GROUP INC | y84170exv99w4.htm |
Exhibit 99.5
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
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IN RE THE GOLDMAN SACHS GROUP, INC. |
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SHAREHOLDER LITIGATION |
: | C.A. No. 5215-CC | ||
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AMENDED SHAREHOLDER DERIVATIVE COMPLAINT
Co-Lead Plaintiffs Southeastern Pennsylvania Transportation Authority and International
Brotherhood of Electrical Workers Local 98 Pension Fund (Plaintiffs), by and through their
undersigned attorneys, allege as follows:
NATURE OF THE ACTION
1. This action challenges the executive compensation practices of the
Goldman Sachs Group, Inc. (Goldman, Company, or Firm) and arises from the
following: (a) Nearly 50% of Goldmans net revenues have been and continue to be
allocated to the compensation of its management, while public shareholders, whose
equity renders possible such revenue-generating, receive declining returns, and
(b) Goldmans trading business, its largest revenue-generating business segment and a
primary source of management compensation, has been managed and conducted by
Goldmans senior management in an unethical manner that subjects Goldman to potential
civil liability, as reflected in a recent SEC complaint charging Goldman and a trading
officer with civil fraud, as well as severe reputational harm that will have long-term
impact on the Company.
2. Following heavy fixed-income trading losses for Goldman in the late
1990s, Goldman, under the leadership of Defendant Lloyd C. Blankfein, adopted a
corporate mentality driven by a desire to compete with hedge funds and to compensate
Goldman executives in a manner comparable to successful hedge fund managers. The overwhelming
majority of Goldmans revenues are derived from its Trading and Principal Investment segment, which
invests the firms assets in debt and equity securities as well as direct investments in real
estate. This activity is similar to other investment entities such as hedge funds, which invest and
trade in debt and equity securities, yet Goldmans management is paid vastly more than hedge fund
managers.
3. This pursuit of huge profits has given rise to an expansion of Goldmans
trading business that is a moral bankruptcy, fraught with conflicts of interest and the
systemic breaking of ethical lines. Historically, Goldman was an investment bank that
raised money for its clients. Now it resembles a huge hedge fund that trades extensively
on its own account, often betting against its own clients. Accentuating its inherent-
business conflicts, Goldman encourages and advises its clients to invest in financial
products without disclosing that Goldman, using its extensive analytical tools for its own
investments, is betting against its clients. As Senator Carl Levin, chairman of the Senate
Permanent Subcommittee on Investigations (the Permanent Subcommittee), stated:
Our investigation has found that investment banks such as Goldman Sachs were not
market makers helping clients. They were self-interested promoters of risky and
complicated financial schemes that were a major part of the 2008 crises. They
bundled toxic and dubious mortgages into complex financial instruments, got the
credit-rating agencies to label them as AAA safe securities, sold them to
investors, magnifying and spreading risk throughout the financial systems, and all
too often betting against the financial instruments that they sold, and profiting
at the expense of their clients.
4. The allocation of almost 50% of net revenues, the majority of which are
derived from its Trading and Principal Investment segment, to the managers of the
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shareholders equity is equivalent to paying the managers 2% of net assets plus 45% of investment
profits, a compensation scheme almost double the so-called and often criticized 2 and 20
compensation structure (2% of net assets plus 20% of profits) for large successful hedge funds.
Goldmans management is paid this enormous allocation of profits even though, historically, its
performance has not been due to skill superior to even the average hedge fund advisor but rather
due to managements taking far more risks with investors equity than hedge funds take with their
investors capital. Consequently, Goldmans employees are unreasonably overpaid for the management
functions that they undertake, and shareholders are vastly underpaid for the risks taken with their
equity.
5. Goldmans Board of Directors (the Board) routinely allocates an
excessive amount of net revenues to compensation without considering or analyzing the
extent to which such revenues are the result of the size and availability of shareholder
equity or the risks taken with that equity, as opposed to the efforts of management. In
light of the risks taken with shareholder equity, and the contribution of that equity to
Goldmans results, no reasonable director would approve, year in and year out, of
awarding management almost 50% of net revenues as compensation.
6. The amount of compensation set aside for Goldman officers and managers
bears no relation to the reasonable value of their services. It substantially exceeds
compensation paid to virtually all others providing similar services, even though, on a
risk adjusted basis, Goldmans officers and managers have performed over the past
several years in a manner that is, at best, only average when compared to comparable
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professionals who perform similar services. Since 1999, Goldmans officers and managers have been
able to exceed the returns obtained by average hedge funds only by taking substantially greater
risks, principally leveraging the firms assets to speculative levels. On a risk adjusted basis,
the performance of Goldmans managers and officers has lagged far behind hedge fund indices.
7. Such speculative leveraging was responsible for the demise of several
investment banks, including Lehman Brothers and Bear Stearns, who were forced into
bankruptcy, and to a lesser extent, Merrill Lynch, which evaded bankruptcy only when it
was acquired by Bank of America. In 2007 and 2008, Goldman was even more highly
leveraged than either Lehman or Bear Stearns and would have likely shared the fate of
those firms if it had not been allowed to convert to a bank holding company (an option
denied Lehman Brothers) and if it had not been the beneficiary of a bail-out by the
Federal government and American taxpayers. Goldmans officers and managers, having
nearly destroyed the capital of Goldmans equity owners and with little or no risks to
themselves, in order to generate their own compensation, have distributed, by
comparison, a de minimis amount to the shareholders who shouldered all of the risk.
While the managers and officers of Goldman are wealthier than they were in 2008 by
tens of billions of dollars, the Firms shareholders are in a worse position, the dividends
hardly compensating for the decline in Goldmans stock price over the past three years.
8. In 2009, the allocation of almost 50% of Goldmans net revenues to
compensation is particularly excessive and unfair. As of September 25, 2009,
Defendants had reserved almost $17 billion for issuance to Company employees, and
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Goldman
was reported to be on track to hand out compensation in excess of $22 billion for
the year 2009 alone. This amounts to the most compensation which would ever have been paid to
employees in the history of the Firm. Goldmans success this year, however, has been even less the
product of the skill and business acumen of the Companys employees than that of prior years.
Instead, Goldmans net revenues in 2009 were almost entirely the result of the availability of
capital when other competitors had failed, as well as the government bail-out of a financial system
that it was determined to preserve. Management should not be compensated for this fortuity of
circumstances; the benefit of the presence, size, and survival of Goldmans capital should go to
the owners of the Firm, not its managers.
9. Because all of the directors of Goldmans Board were aware, or should have been aware, of
Goldmans wrongful conduct in its trading business, and a majority of directors on Goldmans Board
are either named executive officers or have extensive financial relationships with Goldman,
including, inter alia, charitable donations or financing at the discretion of Goldmans
management, the Board cannot make independent decisions with respect to decisions that affect
managements compensation. While the Board has consistently and regularly approved paying
management almost 50% of net revenues, it has returned very little of the net revenues to the
shareholders in the form of dividends. While management regularly receives almost 50% of net
revenues, shareholders have consistently, with very few exceptions, received less than 2% of net
revenues as dividends. Thus, the Board hoards the portion of the net revenues that it does not
give away to management, which has the effect of increasing shareholder
5
equity, and in turn increases future net revenues from which management takes almost 50%. This
endless cycle benefits Goldmans management unfairly at the expense of its shareholders, and
breaches the Defendants duties of good faith, loyalty and due care.
10. Plaintiffs bring this action to remedy the Defendants failure to act in the
interests of Goldman and its shareholders, to remedy their breaches of fiduciary duty in
failing to monitor its operations, allowing the Firm to manage and conduct the Firms
trading segment in an grossly unethical manner, subjecting Goldman to potential civil
liability and severe reputational harm, which will have a long-term impact on the
Company, and granting management a grossly excessive share of the Companys net
revenues while withholding all but a negligible percentage of those revenues from
shareholders, and to assure that any prospective fees, fines or taxes imposed by any
federal or state regulator or governmental unit (including, but not limited to, the federal
tax on large financial institutions proposed by President Barack Obama on January 14,
2010) on Goldman related to its abusive compensation practices be borne solely by
Goldman management from their future compensation.
THE PARTIES
11. Plaintiff
Southeastern Pennsylvania Transportation Authority has
continuously held Goldman stock at all times material hereto.
12. Plaintiff International Brotherhood of Electrical Workers Local 98 Pension
Fund has continuously held Goldman stock at all times material hereto.
13. Defendant Goldman is a Delaware corporation headquartered at 85 Broad
Street, New York, NY 10004. Goldman is a leading global financial services firm
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providing investment banking, securities, and investment management services to a diversified
client base that includes corporations, financial institutions, governments, and high-net-worth
individuals.
14. Defendant Lloyd C. Blankfein (Blankfein) has served as the Chairman
and CEO of Goldman since June 2006. Blankfein has worked for Goldman Sachs and its
predecessor, Goldman Sachs Group, L.P., since 1994, and has served as a director of the
Company since April 2003.
15. Defendant Gary D. Cohn (Cohn) has served as a director and as
President and co-chief operating officer of the Company since April 2006. Cohn has
worked for Goldman Sachs and its predecessor since 1996.
16. Defendant John H. Bryan (Bryan) has served as a director of the
Company since November 1999. In addition, Bryan has served as a member of the
Boards Audit Committee (the Audit Committee) and Compensation Committee during
the Relevant Period. Bryan is the retired chairman and chief operating officer of Sara
Lee Corporation.
17. Defendant Claes Dahlback (Dahlback) has served as a director of the
Company since June 2003. Dahlback is a member of both the Audit Committee and the
Compensation Committee. Dahlback is a citizen of Sweden.
18. Defendant Stephen Friedman (Friedman) has served as a director of the
Company since April 2005. In addition, Defendant Friedman has served as a member of
both the Audit Committee and the Compensation Committee during the Relevant Period.
Friedman is a New York citizen.
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19. Defendant William W. George (George) has served as a director of the
Company since December 2002. In addition, Defendant George has served as a member
of both the Audit Committee and the Compensation Committee during the Relevant
Period. George is a Massachusetts citizen.
20. Defendant Rajat K. Gupta (Gupta) has served as a director of the
Company since November 2006. In addition, Defendant Gupta has served as a member
of both the Audit Committee and the Compensation Committee during the Relevant
Period. Gupta is a Connecticut citizen.
21. Defendant James A. Johnson (Johnson) has served as a director of the
Company since May 1999. In addition, Defendant Dahlback has served as a member of
both the Audit Committee and the Compensation Committee during the Relevant Period.
Johnson is a Washington, DC citizen.
22. Defendant Lois D. Juliber (Juliber) has served as a director of the
Company since March 2004. In addition, Defendant Juliber has served as a member of
both the Audit Committee and the Compensation Committee during the Relevant Period.
Juliber is a New York citizen.
23. Defendant Lakshmi N. Mittal (Mittal) has served as a director of the
Company since June 2008. In addition, Defendant Mittal has served as a member of both
the Audit Committee and the Compensation Committee during the Relevant Period.
Mittal is a New York citizen.
24. Defendant James J. Schiro (Schiro) has served as a director of the
Company since May 2009. In addition, Defendant Schiro has served as a member of
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both the Audit Committee and the Compensation Committee during the Relevant Period.
25. Defendant Ruth J. Simmons (Simmons) has served as a director of the
Company since January 2000. In addition, Defendant Simmons has served as a member
of the Compensation Committee during the Relevant Period.
26. Defendant David A. Viniar (Viniar) has served as Executive Vice
President and CFO of the Company since 1999.
27. Defendant J. Michael Evans (Evans) has served as a Vice Chairman of
Goldman since February 2008 and chairman of Goldman Sachs Asia since 2004.
28. Defendants Blankfein, Cohn, Bryan, Dahlback, Friedman, George, Gupta,
Johnson, Juliber, Mittal, Schiro, Simmons, Viniar, and Evans shall be referred to herein
as the Defendants.
29. Blankfein, Cohn, Viniar, and Evans shall be referred to as the Executive
Officer Defendants.
30. Defendants Blankfein, Cohn, Bryan, Dahlback, Friedman, George, Gupta,
Johnson, Juliber, Mittal, Schiro, and Simmons shall be referred to as the Director
Defendants.
31. Defendants Byran, Dahlback, Friedman, George, Gupta, Johnson, Juliber,
Mittal, and Schiro shall be referred to herein as the Audit Committee Defendants.
32. Defendants Byran, Dahlback, Friedman, George, Gupta, Johnson, Juliber,
Mittal, Schiro, and Simmons shall be referred to herein as the Compensation Committee
Defendants.
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SUBSTANTIVE ALLEGATIONS
Background of the Company
33. Goldman began over 140 years ago when Marcus Goldman opened a one room office and began
trading promissory notes. Shortly thereafter, it expanded into a partnership in which its partners
provided all of the equity capital, took all of the financial risk, and shared in all of the
Companys profits.
34. Goldman remained a private partnership for almost 130 years until its initial public
offering (IPO) in 1999. Goldman decided to access the public capital markets and raise capital
through an initial public offering. In its IPO, the Company offered just 12% of its stock to the
public, retaining 48% held by the Firms partners, 22% held by non-partner Firm employees, and 18%
held by two long term investors. Since then, however, the Firms partners and employees have sold
their equity interests to the public shareholders, who now own over 88% of the Companys equity,
leaving insiders with just over 11% of the Companys outstanding shares.
35. When it went public in 1999, Goldmans common shareholder equity was $10 billion, and it
had $258 billion of assets under management (not including client assets). Its shareholder equity
as of December 2009 was $65.5 billion, and it had $871 billion in assets under management.
Additionally, its shareholder equity as of March 31, 2010 was $72.94 billion, and it had $881
billion in assets under management.
36. Goldman operates in three business segments: investment banking, trading and principal
investments, and asset management and securities services. By far the largest business segment,
and the segment to which Goldman commits the largest
10
amount of capital, is the trading and principal investment segment. That segment currently
generates over 75% of Goldmans revenue and income in any given year.
37. The Investment Banking segment is divided into two components, financial advisory and
underwriting. The financial advisory segment includes advising clients with respect to mergers and
acquisitions, divestitures, corporate defense activities, restructurings, and spin-offs. The
underwriting segment includes public offerings and private placements of a wide range of
securities and other financial instruments.
38. For the year ended December 2009, Goldmans Investment Banking segment generated $4.8
billion in revenues and had pre-tax earnings of $1.27 billion. The Investment Banking segment
employed assets of $1.48 billion in December 2009. Additionally, for the first three months ended
March 31, 2010 Goldmans Investment Banking segment generated $1.18 billion in revenues and had
pre-tax earnings of $823 million.
39. The Asset Management and Securities Services segment is divided into two components. The
Asset Management component provides investment advisory and financial planning services and offers
investment products, through separately managed accounts and commingled vehicles, such as mutual
funds and private investment funds, to institutions and individuals worldwide. It primarily
generates revenues from management and incentive fees. Assets under management generate fees
typically as a percentage of asset value, but Goldman also has numerous fee arrangements in which
it receives incentive fees based on a percentage of a funds return or exceeding specified
benchmark returns or performance targets. The Securities Services component provides
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prime brokerage services, financings services and securities lending services to institutional
clients, including hedge funds, mutual funds, pension funds and foundations, and to high-net-worth
individuals worldwide. It generates revenues primarily in the form of interest rate spreads and
fees.
40. In the year ended December 2009, the Asset Management and Securities Services segment
generated revenues of $6.0 billion, including net interest income of $1.93 billion, and had pre-tax
earnings of $1.34 billion. The segment employed assets of $184.7 billion as of December 2009.
Additionally, in the first three months ended March 31, 2010, the Asset Management and Securities
Services segment generated net revenues of $1.34 billion and had pre-tax earnings of $989 million.
41. The Trading and Principal Investments segment is divided into three areas, FICC,
Equities, and Principal Investments. In FICC, Goldman makes markets in and trades interest rate
and credit products, mortgage-related securities and other asset backed instruments, currencies
and commodities. It also structures and enters into a wide variety of derivative transactions and
engages in proprietary trading and investing. In Equities, Goldman makes markets in and trades
equities and equity related products, structures and enters into equity derivative transactions
and engages in proprietary trading. In Principal Investments, Goldman makes real estate and
corporate principal investments, including its investment in the ordinary shares of ICBC.
Goldmans inventory in Trading and Principal Investments is marked-to-market daily, and,
therefore, its value and Goldmans net revenues are subject to fluctuations based on market
movements. Goldman regularly enters into large transactions as part of its trading businesses, and
the number and size of
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those transactions may affect its results in any given period.
42. In the year ended December 2009, Trading and Principal Investments generated net revenues
of $34.37 billion, including $5.49 billion in net interest income, and had pre-tax earnings of
$17.32 billion. The segment employed $662.75 billion of the firms $849 billion in assets as of
December 2009. In addition, for the first three months ended March 31, 2010, Trading and Principal
Investments generated net revenues of $10.25 billion, and had pre-tax earnings of $5.71 billion.
43. The Trading and Principal Investments segment generated the overwhelming majority of
Goldmans net revenues 76.1% in the year ending December 2009, just as it had in previous
years. The segment also used the overwhelming majority of the firms assets $662.75 billion in
generating that revenue and income. Additionally, for the first three months ended March 31, 2010,
the Trading and Principal Investments segment continued to generate the overwhelming majority of
Goldmans net revenues 80.2%.
44. The amount of revenue and income that Trading and Principal Investments has generated for
Goldman has increased from approximately 40%, when the firm went public and in the early part of
the decade, to approximately 70% today, with the exception of 2008 when Goldman had to write down
the value of its huge bet on mortgage-related securities.
45. The Trading and Principal Investments segment is similar to a hedge fund. It utilizes
shareholder equity, $72.94 billion as of March 2010, to produce returns. The returns are the
result of the massive risks that Goldman takes with the shareholders
13
equity and the leveraging of that equity. Goldman employs far more leverage, and therefore exposes
shareholder equity to far more risk, than almost all hedge funds. On a risk adjusted basis,
Goldmans return on capital has trailed the recognized hedge fund indices.
Goldmans Trading History
46. Although outwardly Goldman Sachs is an investment bank with a wide variety of operations,
the focus of its business has increasingly been on trading, through its Trading and Principal
Investments segment. Trading is high-level, high-stakes betting. In the early 1990s, while still a
privately-held company, Goldman suffered large trading losses. Those losses resulted in the
depletion of large sums of partner capital and a corresponding exodus of numerous top partners.
47. Into a resulting leadership vacuum stepped Jon Corzine, a fixed-income trading partner,
who was a strong believer that Goldman should be public. By 1998, Goldmans partners were
persuaded to take the bank public, but before the IPO could come to market, the $4.6 billion hedge
fund Long Term Capital Management melted down, causing a crisis on Wall Street, including heavy
fixed-income trading losses for Goldman. Corzine was forced out and Henry Paulson, who had an
investment banking background, replaced him.
48. Goldman went public in 1999. No longer was Goldman playing with its partners capital,
but with shareholders money. Paulson was CEO from 1999 to 2006; he was replaced by Defendant
Blankfein. During the latter years of Paulsons tenure, Goldman traders became wealthier and more
powerful in the bank. Defendant Blankfein,
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the head of Goldmans trading business, was appointed in 2003 as co-chief operating officer by
Paulson, along with John Thain. Thain was recruited to become the head of the New York Stock
Exchange later that year and Blankfein became the heir apparent.
49. Blankfein became CEO in 2006 and surrounded himself with other
traders, like-minded Lloyd loyalists including his chief operating officer Defendant Gary Cohn,
and remade Goldman. The corporate mentality was driven by a desire to compete with hedge funds
and to compensate Goldman executives in a manner comparable to successful hedge fund managers.
This pursuit of huge profits has given rise to an expansion of Goldmans trading business that is
fraught with conflicts of interest and fuzzy ethical lines:
Under Blankfein, Goldman continued to grow exponentially: by 2007 the firms revenues were
$46 billion, nearly three times that of 2000. In large part, this was the result of a
strategy, begun under Paulson but embraced by Blankfein, in which Goldman no longer sat on
the sidelines, dispensing advice, but rather invested its own money alongside its
clients. Goldman now has a money-management business; a large private-equity business,
meaning that while big buyout funds are Goldmans clients they are also its competitors;
and a proprietary trading business, which exists specifically to trade Goldmans capital
on Goldmans behalf so hedge-fund clients are also competitors. Across Goldmans many
trading businesses, the line is fuzzy as to when the firm is acting for itself and when it
is acting on behalf of clients.
(Jan. 2010 Vanity Fair, pp. 124).
50. Banking has now become an adjunct of the trading business, where the real money is made.
While Goldman employs 31,000 people, in businesses ranging from money management to traditional
investment banking, the bank makes the bulk of its profits from trading. The trading-dominated
culture at Goldman has caused its other banking sectors to come under scrutiny that has resulted
in belt-tightening measures and
15
revenue-generating measurements that are not imposed on the trading business. Having learned hard
lessons of the trading business and losses it incurred in the 1990s, Goldman executives were able
to develop strategies that essentially marginalized its trading losses. Goldman accomplished this
by developing a system of counter-party trading that pitted Goldman against its clients and those
to whom it dispensed investment advice.
51. Defendant Blankfein has stated that Goldman no longer seeks to avoid conflicts. Instead,
the Company seeks to manage them. Goldman often views its customers as trading counterparties,
that is, the traders on the other side of Goldmans own bets in the markets. Defendants Blankfein
and Cohn have embraced this idea, arguing that the banks goal should be to wear several hats at
once. Goldman hopes to advise a client, finance that client, invest in that clients deal and
make money at every step along the way.
52. Perhaps no more graphic example of this trading strategy at work was the mortgage and
housing crisis that became publicly apparent in late 2007. Goldman was well aware of the impending
subprime mortgage market collapse and sought to take advantage of it, at the expense of their
clients. A full year earlier, in December 2006, Goldmans senior executives began to personally
oversee the mortgage department. In late 2006, Dan Sparks, the head of Goldmans mortgage unit,
wrote to Goldmans top executive that the subprime market [was] getting hit hard, with the firm
losing $20 million in one day.
53. On December 14, 2006, Defendant Viniar, Goldmans CFO, called Goldmans mortgage traders
and risk managers into a meeting to discuss investing
16
strategy, concluding that they would reduce the Firms overall exposure to the subprime mortgage
market. Goldman executives instructed Goldman traders to sell housing-related investments to its
clients while directing that Goldman capital be bet against mortgage investments. Defendant Viniar
stated in a December 15, 2006 email On ABX, the position is reasonably sensible but just too big.
Might have to spend a little to size it appropriately. On everything else my basic message was
lets be aggressive distributing things because there will be very good opportunities as the
markets goes into what is likely to be even great distress and we want to be in position take
advantage of them. By early 2007, Goldmans mortgage unit had become a hive of intense activity,
which included the structuring of synthetic collateralized debt obligation (CDOs).
54. A synthetic CDO is a security that rather than containing actual financial assets,
contains derivatives, or contracts referencing the performance of other financial assets. In the
case of many of the deals created by Goldman, the financial assets were mortgages. Bonds backed by
the mortgages were bundled together in a process which enabled mortgage lenders to make even more
loans, called credit default swaps. The synthetic CDOs consisted of these credit defaults swaps,
which operated like insurance policies written on these mortgages bonds. If the bonds performed
well, those who bought the credit default swaps would make a steady stream of small payments -
much like insurance premiums to investors who bought the synthetic CDO notes. If the bonds
performed poorly, those who bought the credit default swaps would receive potentially large
payouts.
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55. A synthetic CDO by its very design has long and short parties. One party takes the short
position betting on the fact that the underlying mortgages will fail. The other party takes the
long position betting on the fact that the underlying mortgages will do well. Thus, a synthetic CDO
is a financial instrument that lets investors bet on the future value of certain mortgages backed
securities without actually owning them and when the defaults spread and the bond plunged, it
generated billions of dollars of loss for the synthetic CDO investors and billions in profit for
the investors of the credit default swaps.
56. Not only was Goldman structuring the synthetic CDOs in a way that made them destined to
fail, but in connection with the creation of these synthetic CDOs, Goldman was going to the rating
agencies to persuade them to give these deals an investment rating. Goldman hired the rating
agencies, who began as market researchers selling assessments of corporate debt to people
considering whether to buy that debt, to give the debt Goldman was selling these synthetic CDOs
a seal of approval. This system not only produced huge conflicts of interest but also rendered
the rating agencies criteria devoid of meaning. Goldman could choose among several rating
agencies, enabling them to direct their business to whichever agency was most likely to give a
favorable verdict, and threaten to pull business from an agency that tried too hard to do its job.
A Standard & Poors (S&P) analyst stated that, [t]he bankers [at Goldman] would say anything to
get what they needed in their deals. Goldman would look at every deal and every CDO that has ever
been issued and would look for inconsistencies
18
across different deals and use that to strong-arm Moodys, Fitch and S&P to change their criteria.
57. After an 18-month probe conducted by the Senate Permanent Subcommittee, it concluded that
the Moodys Investors Service (Moody) and S&Ps were influenced by Wall Street, had conflicts of
interest and ignored signs that fraud and lax lending had infected the housing market when grading
mortgage securities which ultimately blew up when the U.S. housing market collapsed in 2007.
According to the Permanent Subcommittee, Moodys and S&P deferred to investment banks that were
paying them to assign ratings to securities composed of pooled mortgages. Credit-rating agencies
allowed Wall Street to impact their analysis, their independence and their reputation for
reliability, Senator Carl Levin, the Michigan Democrat who leads the investigative panel, told
reporters in Washington on April 26, 2010: They did it for the big fees that they got. S&Ps
residential mortgage-backed securities group had become so beholden to their top issuers for
revenue they have all developed Stockholm syndrome which they mistakenly tag as customer value
creation, an unidentified S&P employee wrote in an August 2006 e-mail. Stockholm syndrome
describes hostages who have developed positive feelings for their captors.
58. As the housing market began to fracture in early 2007, a committee of senior Goldman
executives began overseeing the mortgage department more closely. Senior executives, including
Defendants Viniar, Cohn, and Blankfein and those helping to manage Goldmans mortgage, credit and
legal operations, took an active role in overseeing the mortgage unit, including by making routine
visits to the mortgage unit,
19
often for hours at a time. The committees job was to vet potential new products and transactions,
being wary of deals that exposed Goldman to too much risk. With the mortgage market primed for a
meltdown, there was much to discuss at any given meeting.
59. It was this committee, comprised of Goldmans top leadership that finally ended the
dispute on the mortgage desk by siding with those who believed home prices would decline, making
the decision to get rid of positive bets on mortgages. This decision to make negative bets on
mortgages allowed Goldman to profit from its mortgage business as the housing bubble was inflating
and then again when the bubble burst.
60. In at least 2007, and as acknowledged by Defendants Blankfein, Viniar and Cohn, Goldmans
short bets were eclipsing the losses on its long positions, rendering any losses suffered by
Goldman due to the subprime mortgage market collapse a mere fiction due to their short positions,
and enabling Goldman to profit as housing prices fell and homeowners defaulted on their mortgages.
Defendant Blankfein stated [o]f course we didnt dodge the mortgage mess. We [Goldman] lost
money, then made more than we lost because of shorts. In a March 6, 2007 email, Defendant Cohn
stated a Big plus could hurt the Mortgage business but Justin thinks he has a big trade lined up
for morning to get us out of a bunch of our short risk. In a July 25, 2007 email to Defendant
Cohn, Defendant Viniar, Goldmans CFO, remarked on figures that showed the company had made a $51
million profit in a single day from bets that the value of mortgage-related securities would drop,
stating: [t]ells you what might be happening to people who dont
20
have the big short. Documents released by the Senate Permanent Subcommittee appear to indicate
that in July 2007, Goldmans accounting showed losses of $322 million on positive mortgage
positions, but its negative bet what Defendant Viniar called the big short brought in $373
million.
61. Additionally, the Goldman Board was also aware of Goldman taking short positions. A
summary of a Goldman Board Meeting during the relevant time period said that although broader
weakness in the mortgage market resulted in significant losses in cash positions, we were overall
net short the mortgage market and thus had very strong results.
62. With its conduct with respect to the housing and mortgage markets, Goldman had crossed a
clear line. It was not only using its extensive analytical tools to direct its own Firms and
partners capital investments, but was advising and urging its clients to put their money in
investment vehicles that Goldmans analyses showed were likely to collapse.
63. Goldman has clearly lost its way and has violated the first of its so-called
principles: Our clients interests always come first. Our experience shows that if we serve our
clients well, our own success will follow.
Goldman Sachs and The Abacus Deals
64. Goldman structured a deal by the name of Abacus in early 2007, helping one of its
clients, hedge fund Paulson & Co., to design a security known as a collateralized debt obligation
(CDO), which was built out of a set of risky mortgage assets that the fund and founder John
Paulson helped select. Paulson then placed a
21
short bet that the mortgages contained in the Abacus CDO, Abacus 2007-AC1, would fall in value.
Goldman marketed long positions, i.e. bets that the mortgage portfolio would increase in value, to
other clients without disclosing Paulsons involvement in creating the portfolio and his bearish
bet.
65. The ABACUS 2007-AC1 deal was presented to the committee of senior executives which
oversaw the mortgage department in a routine meeting and quickly approved the same day it was
presented to the group of roughly a dozen senior executives in a routine meeting. Abacus 2007-AC1,
was one of 25 deals that Goldman created, worth $10.9 billion, so the Firm and select clients could
bet against the housing market.
66. American International Group (AIG) insured $6 billion of the Abacus securities issued
by Goldman. AIGs participation was crucial to the success of many Abacus securities issued by
Goldman Sachs. In the Abacus deals, a type of derivative known as credit default swaps were linked
to mortgage bonds; those firms underwriting the swaps, like AIG, were essentially insuring that
the mortgage bonds would perform well. When they did not, the swaps created enormous losses for
those who sold them. As the Abacus deals plunged in value, Goldman and certain hedge funds made
money on their negative bets, while the Goldman clients who bought the $10.9 billion in
investments lost billions of dollars.
67. Since the government rescued AIG in September 2008, AIG has posted $2 billion in losses
on the Abacus securities. AIG received a taxpayer commitment of $180 billion to keep it from
failing and causing havoc in the market worldwide.
68. Goldman has claimed that it made only $15 million in fees from its role
22
in Abacus
2007-AC 1 and, further, that it, too, lost money $90 million on its own investment in
that synthetic CDO. However, Goldman invested the money only because sales of the deal did not play
out as planned, forcing Goldman to step up with its own money. Further, what Goldman fails to
mention, however, (a) how it came to lose $90 million; (b) that it purchased, for pennies on the
dollar, approximately $6 billion of credit default swaps on all of the Abacus financial
instruments, including Abacus 2007-AC 1, and therefore, whatever investment loss it may have
suffered was a ruse that was insured by, among others, AIG, and (c) in any case, such loss was
dwarfed by the billions Goldman profited by in protecting its investments in Abacus and other
similar CDOs. Goldmans clients who took long positions in ABACUS 2007-AC1 lost their entire $1
billion investment.
69. Not only was Goldman structuring the synthetic CDOs in a way that made them destined to
fail, but as was consistent with its practice, after creating these synthetic CDOs, Goldman went
to the rating agencies to persuade them to give these deals a rating Goldman believed it deserved.
Indeed, a trader at one point complained to an investor who was buying into Abacus that he was
having trouble persuading Moodys to give the deal the rating he deserved. Nevertheless,
McGraw-Hill Cos. Standard and Poors unit placed their once-revered triple-A ratings on the
Abacus deal. Notably, by October 24, 2007, six out of seven of the mortgages underlying ABACUS
2007-AC1 had been downgraded; three months later, almost all of the mortgages had been
downgraded; and as of the filing of this Amended Shareholder Derivative Complaint, more than half
of the
23
500,000 mortgages from forty-eight states underlying the Abacus deal were in default or
foreclosure.
70. In or around July 2009, Goldman received a Wells notice from the Securities and Exchange
Commission (SEC) relating to the ABACUS 2007-AC1 transaction and issues relating to it
practices in the mortgage market.
71. On April 16, 2010, the SEC charged Goldman and a 31 year-old vice president, Fabrice
Tourre, a London-based Goldman trader, with fraud in their roles in creating and marketing the
ABACUS 2007-AC1 financial instruments, and in concealing from ACA Management LLC (the third party
collateral manager hired by Goldman to ostensibly select the portfolio assets) and the investors
material facts relating to the selection process and adverse economic interests of Goldman and
Paulson with respect to those long positions.
72. The Abacus deals were not unique. The Permanent Subcommittee, in its April 26, 2010
report, shed light on other similar transactions where Goldman packaged and created synthetic CDOs
to sell to its clients with the expectation that those financial vehicles would fail, thereby
providing Goldman with an opportunity to garner huge and ill-gotten profits on its shorting of
those investments, at the expense of their clients. These ill-gotten profits would not only be
tunneled in large part to the compensation of Goldmans employees, who had engaged in the disloyal
and unethical trading practices which led to these profits, but also these profits came about by
virtue of the disloyal and unethical trading practices which have subjected the Firm to civil
liability, via, inter alia, an SEC investigation and lawsuit, which will result in hundreds of
millions of dollars
24
spent to defend themselves and potentially even more paid in damages; and severe reputational
harm which will have a long-term and detrimental financial impact on the
Company. The Permanent Subcommittees report states:
Conflict Between Proprietary and Client Trading. After Goldman Sachs decided
to reduce its mortgage holdings, the sales force was instructed to try to sell
some of its mortgage related assets, and the risks associated with them, to
Goldman Sachs clients. In response, Goldman Sachs personnel issued and sold to
clients RMBS and CDO securities containing or referencing high risk assets that
Goldman Sachs wanted to get off its books. Three examples demonstrate how Goldman
Sachs continued to sell mortgage related products to its clients, while profiting
from the decline of the mortgage market.
Hudson Mezzanine 2006-1 (Hudson 1) was a synthetic CDO that referenced $2
billion in subprime BBB-rated RMBS securities. This CDO was underwritten and sold
by Goldman Sachs in December 2006. Goldman Sachs selected the referenced assets,
collaborating with its mortgage traders to identify BBB rated assets on its books.
About $800 million in subprime RMBS securities and $1.2 billion in ABX index
contracts were referenced in the CDO. Goldman executives told the Subcommittee that
the company was trying to remove BBB assets from the company books during this
period of time. Goldman Sachs was the sole short investor in this proprietary deal,
buying protection on all $2 billion in referenced assets and essentially placing a
bet that the assets would lose value. Goldman Sachs personnel placed a high
priority on selling the Hudson securities. Evidence of this is illustrated by the
Hudson 1 deal being pushed ahead of a client transaction. One Goldman Sachs
employee noted that a client was upset that we are delaying their
deal. They know that Hudson Mezz (GS prop deal) is pushing their deal back.
Less than 18 months later, the AAA securities had been downgraded to junk status.
Goldman Sachs as the sole short investor would have been compensated for these
losses, and investors who purchased the Hudson securities would have lost an
equivalent amount. Goldman Sachs profited from the loss in value of the very CDO
securities it had sold to its clients.
Anderson Mezzanine Funding 2007-1 was a synthetic CDO referencing about $300
million in subprime RMBS BBB securities. Goldman Sachs structured the deal and
participated as one of the short investors, buying loss protection for $140
million, or nearly 50 percent, of the referenced assets. During the first calendar
quarter of 2007, Goldman
25
Sachs underwrote and sold the Anderson CDO securities. Most of the referenced assets were subprime
RMBS securities, backed by high risk mortgages. The largest originator of the high risk mortgages
was New Century Mortgage, a lender which was known for poor quality loans and which Goldman Sachs
knew was in poor financial condition. Goldman senior managers directed their sales force to sell
the Anderson securities quickly due to poor subprime news. In fact, Goldman manager Jonathan Egol
advised Goldman personnel to sell the Anderson securities before completing an Abacus deal: Given
risk priorities, subprime news and market conditions, we need to discuss side-lining this deal
([Abacus 2007-]ACl) in favor of prioritizing Anderson in the short term. The top rating given to
the Anderson securities was BBB; about 7 months after the securities were sold, Anderson was
downgraded to junk status.
A third example involves Timberwolf I, a hybrid cash/synthetic $1 billion CDO squared, which
Goldman Sachs underwrote and sold in the first calendar quarter of 2007. A significant portion of
the referenced assets were CDO securities backed by subprime RMBS mortgages. Some of the
referenced assets were backed by Washington Mutual Option ARM mortgages, high risk mortgages whose
value was dropping as housing prices declines A memorandum sent to the Goldman Sachs Mortgage
Capital Committee indicated that the Timberwolf CDO would contain 50 percent CDO securities and 50
percent collateralized loan obligation (CLO) securities, but Goldman Sachs told the Subcommittee
that, since the value of the CLOs had improved, the firm had sold the best-performing CLO
securities separately. In the end, Timberwolf referenced assets consisted of 94 percent CDO
securities, including about $15 million in Abacus CDO securities. Goldman Sachs was the short
investor for
many of the Timberwolf referenced assets, including the Abacus securities, betting that they
would decline in value.
A senior executive in Goldman Sachs sales expressed concern about what representations might
be made to clients about the Timberwolf CDO squared, but other Goldman personnel urged the sales
force to treat Timberwolf securities as a priority. An email from Dan Sparks, head of the Goldman
Sachs mortgage department, urged Goldman personnel working on a potential Korean sale to [g]et er
done, and sent a mass email to the sales force promising ginormous credits for selling the
securities. A congratulatory email was sent to an employee who sold a number of the securities:
Great job... trading us out of our entire Timberwolf Single-A position. In mid-spring, Goldman
Sachs sold about $300 million of Timberwolf during the summer. Within five months of issuance, the
CDO lost 80 percent of its value, and was later liquidated in 2008. The AAA securities issued in
March 2007, were downgraded to
26
junk status in just over a year. The Goldman trader responsible for managing the
deal later characterized the day that Timberwolf was issued as a day that will
live in infamy. A senior Goldman executive described the deal as follows: Boy
that timberwof [sic] was one shi**y deal.
(footnotes omitted).
73. The Abacus 2007-AC1 transaction and its ilk raise much broader issues than the SECs
claims that Goldman may have committed civil fraud in marketing these synthetic CDOs without
disclosure of material facts. The broader issues include:
(a) | Why was Goldman creating and selling to its clients what fundamentally was a gambling vehicle? | ||
(b) | Why was Goldman creating and selling deals that served no purpose for the capital markets? | ||
(c) | Why was Goldman creating and selling deals that served no purpose for society? |
74. As a regulated bank, Goldman was not in the casino wagering business. Even if its clients
understood (which it is likely they did not) that they were making wagers, and not investments,
when they purchased interests in synthetic CDOs, why would Goldman create and recommend such
investments to their clients?
75. Additionally, these synthetic CDOs did not raise capital for any useful purpose. Once you
take away the ratings arbitrage, the foundation of many of these synthetic CDOs disappears
altogether. Even Tourre, the creator of Abacus, recognized that these synthetic CDOs had no
purpose. As the subprime boom was nearing an end, even as Tourre arranged to sell mortgage
products to the firms clients, in January 2007, he described creating a thing which has no
purpose, which is absolutely conceptual and
27
highly theoretical. Something is fundamentally amiss in a companys financial culture that thrives
on products that create nothing and produce nothing except new ways to make bigger bets and stack
the deck in favor of the house.
76. On April 16, 2010, when the market opened, Goldman had a $96.6 billion market
capitalization. Upon the revelation to the market of the this latest information regarding
Goldmans trading practices, including the SECs allegations and the extent to which Goldman was
suffering from a moral bankruptcy, when the market closed, Goldman, had an $84.6 billion market
capitalization, losing more than 12% of its value in a single day.
77. Additionally, investors that lost money on these mortgage securities transaction, like
AIG, have stated that they were reviewing their options, including possibly bringing lawsuits.
78. For decades, Goldmans platinum reputation has attracted top investors and stock
underwriting deals. Goldmans relentless focus on profit has allowed it to beef up its financial
capital in the wake of the crisis. However, this focus has created a deficit when it comes to
Goldmans political and public capital, putting its sterling reputation, a foundation of its
financial success, on the line. The Firms insistence, for example, that it can take many sides of
a trade on behalf of different clients and yet manage the inherent conflicts is increasingly
untenable, rather than putting considerations of fairness and transparency on par with
profitability. Goldman is engaging in increasingly risky practices in the name of profit and
paying big bonuses to their employees, all at the expense its shareholders, its clients, and the
public taxpayers. Indeed, even Goldmans
28
bottom line has suffered as a result, losing more than 12% of its value in a single day.
79. The Companys Audit Committee is charged with assisting the Board in its oversight of the
Companys management of market, credit, liquidity and other financial and operational risks. In so
doing, the members of the Audit Committee are required [t]o review generally with management the
type and presentation of any financial information and earnings guidance provided to analysts and
rating agencies and [t]o discuss with management periodically managements assessment of the
Companys market, credit, liquidity and other financial and operational risks, and the guidelines,
policies and processes for managing such risks.
80. In Goldmans letter to its shareholders accompanying its 2009 Annual Report,
filed on March 1, 2010, Defendants Blankfein and Cohn emphasized that [o]ur duty to
shareholders is to protect and grow our client-focused franchise by remaining true to our
team work and performance-driven cultures. Reiterating Goldmans commitment to their
clients interests, Defendants Blankfein and Cohn ended their letter by stating:
Our clients look to us to advise, evaluate and co-invest on their most significant
transactions, translating into strong market shares. And our people remain as
committed as ever to our culture of teamwork, to the belief in their
responsibility to held allocate capital for the benefit of clients, and to the
firms tradition of service and philanthropy.
. . .
We are keenly aware that our legacy of client service and performance, which every
person at Goldman Sachs is charged with protecting and advancing, must be
continually nurtured and passed on from one generation to the next.
81. Despite Goldmans lip service to its dedication to its clients, Goldmans price-fixing
and game-rigging of it synthetic CDO products allowed it to ring up huge
29
trading profits at the expenses of these very same clients. Further, since AIG was insuring
Goldmans investments, the losses that Goldman suffered from these synthetic CDO were only mere
temporary paper losses as a result of Goldmans resulting contractual payments from AIG-issued
credit-default swaps, any supposed risk that Goldman was taking on was a mere fiction and these
payments were ill-gotten gains obtained as a result of its disloyal conduct.
82. Goldman engaged in disloyal and unethical conduct by, inter alia:
| Creating a financial product at the urging of Paulson, a favored client, for the purpose of allowing Paulson to short it at the time that Goldman was going to urge its clients to purchase the product; | ||
| Selling the financial product knowing that Paulson had put an extraordinary amount of research into the likely failure of that product while Goldman urged its clients to purchase the product, knowing that those clients, despite being institutional investors, had not done any appreciable due diligence with respect to the investment and instead were relying on Goldmans advice and on purportedly independent rating agency ratings of the financial product; | ||
| Selecting ACA as the Abacus CDO manager knowing that ACA was unwilling, unable or incompetent to assess the synthetic CDO that it was going to manage for Firms clients; |
30
| Urging, cajoling, strong-arming and directing the rating agencies to give the synthetic CDO financial vehicles an investment-grade rating. Goldmans relationship with the rating agencies was rife with conflicts of interest and lack of independence such that outwardly the rating agencies appeared to be at arms-length from Goldman when, in fact, the rating agencies were beholden to Goldman for a significant stream of income thereby allowing Goldman to coerce, influence and direct the rating agencies actions with respect to the synthetic CDO market. As a result of Goldmans systemic and undue influence on the rating agencies, the ABACUS 2007 AC-1 financial product was rated Triple-A; | ||
| Professing that it, too, was long on the CDO financial product when in fact Goldman hedged its investments through (a) proprietary trading and investments that more than offset that long position and (b) purchased insurance in the form of credit default swaps from AIG, to protect Goldman in the likely event the financial products value eroded. Although Goldman protected itself in this manner, Goldman did not advise its clients to protect their investments in these synthetic CDO financial products; and | ||
| Recognizing the moral bankruptcy of its position with respect to its conduct, Goldman has explained to Japanese clients that it did |
31
not sell synthetic CDOs in Japan, rather than try and justify such sales in the first place. |
83. Given the nearly $11 billion in securities Goldman issued in the inherently risky subprime
mortgage market, financial information regarding which would be provided to analysts and rating
agencies, and the widespread discussion with respect to the housing bubble, it is clear that the
Director Defendants stood by while Goldman advised and allowed its clients to invest good dollars
after bad. The Companys Board of Directors utterly failed to monitor its operations, allowing the
Firm to manage and conduct the Firms trading segment in a grossly unethical manner, subjecting
Goldman to potential civil liability and severe reputational harm. Instead, the Board remained
supine and took no substantive action to address its exposure to risky practices. In short, those
responsible for ensuring that Goldman not mortgage the future and the reputation of the Company for
short-term gains utterly failed to fulfill properly their duties.
Goldmans Purported Pay For Performance Philosophy
84. Hand in hand with Goldmans pursuit of huge profits in its trading strategy is the
grossly excessive compensation it awards to its senior executives, who have been instrumental in
creating and operating Goldmans casino. Notwithstanding the fact that Goldmans revenues and
earnings are the result of the vast amount of capital that Goldman has available to employ, the
Board compensates the managers of that capital its employees, and in particular, its senior
executives with an extravagant and disproportionate share of Goldmans revenue and earnings. In
the guise of a purported pay for performance philosophy, the Board has overcompensated Goldmans
32
employees and senior executives, paying them far more than even hedge managers receive, for
managing the shareholders equity. At the same time, the Board has returned only a very small
proportion of Goldmans earnings to its shareholders, retaining the vast majority of earnings to
add to its capital base and generate more earnings, the vast majority of which are paid to the
employees.
85. Goldmans operating expenses are primarily influenced by compensation, headcount and
levels of business activity, and a significant portion of its compensation expense represents
discretionary bonuses. In every year since Goldman went public, compensation expense has
constituted over 70% of Goldmans operating expenses, except in 2008, when compensation expense
represented just under 60% of operating expenses and 2009, when compensation expense represented
just under 65% of operating expenses. Since Goldman went public, it has been paying its employees
between 44% and 49% of its net revenues, which are its revenues after interest expense, except in
2009 when Goldman paid its employees nearly 36% of its net revenues.
86. Goldman describes its practice of paying its employees almost half of its
net revenues as linking pay to performance. The Companys 2006 Proxy Statement,
Defendants represented that Goldmans compensation program:
was designed to permit the Compensation Committee to provide our executive
officers and Management Committee members with total compensation that is linked
to Goldman Sachs performance to reinforce the alignment of employee and
shareholder interests.
87. The discretionary bonuses that represent a significant portion of Goldmans compensation
expense are particularly important at the senior executive level. According to Goldmans 2007
Proxy Statement, the Companys compensation programs
33
have closely aligned pay and performance, particularly at senior level. The 2007 Proxy Statement
stated that:
our shareholder-approved plan that is designed to pay bonuses that are tied to
the performance of the firm, in order to align the interests of senior management
with the interests of shareholders and to tie the compensation of our senior
executives to the success of the firm.
88. The Companys Compensation Committee is charged with the
responsibility in consultation with senior management, to make recommendations to the
board as to the Companys general compensation philosophy and to oversee the
development and implementation of compensation programs and to review and
approve the annual compensation of the Companys executives. In doing so, however,
the Compensation Committee receives information from Goldmans management
concerning the managements projections of net revenues and the ratio of compensation
and benefits expense to net revenues (compensation ratio). The Compensation
Committee is also presented with information from Company management relating to the
compensation ratio of the Companys core competitors that are investment banks (Bear
Stearns, Lehman Brothers, Merrill Lynch, and Morgan Stanley). No analysis is made
by the Compensation Committee of the extent to which those firms earnings are derived
from activities such as the Trading and Principal Investments segment. Nor does the
Compensation Committee receive information or consider the extent to which Goldmans
net revenues and earnings are the result of availability of the Firms capital, as opposed to
the efforts of management in appropriately allocating it. Finally, in setting the
compensation ratio, the Company does not compare the cost of managing the Firms
capital to the management costs of hedge funds or other enterprises that similarly
34
generate the majority of their revenues and earnings by taking trading and principal risks with
their investors capital.
89. While the Compensation Committee is actively involved in the determination of the
compensation of the senior executives, it appears consistently to approve, without any analysis,
Company managements determination of the compensation ratio, which governs the total amount of
funds available to compensate all employees, including the senior executives. The determination of
that ratio, which ultimately determines the available bonus pool for the senior executives, appears
to be made by management and provided to the Compensation Committee as a projection for its use in
determining the compensation of the senior executives
90. Far from linking pay to performance, Goldmans practice of paying almost
50% of its net revenues as compensation does nothing more than compensate employees
for results produced by the vast amounts of shareholder equity that Goldman has
available to be deployed. Moreover, compensation does not appear to be linked to actual
profitability or to acknowledge in any way the risk undertaken by the owners of the
equity. In 2008, for example, the Trading and Principal Investments segment produced
$9.06 billion in net revenue, but, as a result of discretionary bonuses paid to employees,
lost more than $2.7 billion for the owners of the Company.
Defendants Report Stellar Financial Results That Were Only Achieved By
Excessive Risk-Taking With Shareholder Capital For Short Term Gains
Rather Than the Companys Long-Term Health
Excessive Risk-Taking With Shareholder Capital For Short Term Gains
Rather Than the Companys Long-Term Health
91. The recent liquidity crisis and recession demonstrates that Goldmans net revenues, of
which management claims almost half as compensation, were generated by
35
excessive risk taking for short term gain rather than the long term health of the Company and its
shareholders.
92. Defendants reported that the Companys revenue grew from $29 billion in 2004 to $87
billion in 2007. Further, Defendants reported that the Companys net income increased from $4.5
billion in 2005 to $11 billion in 2007 and earnings per share increased from $8.92 per share in
2004 to $24.73 per share in 2007.
93. This growth was achieved through extreme leverage and significant uncontrolled exposure to
risky loans and credit risks. In 2007, Goldmans leverage of 25:1 exceeded that of Lehman Brothers
and Bear Stearns, two competitors that subsequently collapsed into bankruptcy. As a result of
imprudent leverage and investments in risky mortgage backed securities and other related financial
instruments, Goldman reported that net income plummeted by $9.3 billion, or over 80%, in 2008, and
that earnings per share collapsed by $20.26 per share, or over 80%. Contributing to that collapse
was the $2.7 billion loss in Trading and Principal Investments, which bore the brunt of the write
downs in investments from which the Company had reported its spectacular growth in the preceding
years.
94. Goldmans excessive leverage and risk taking almost led to its demise. In 2008, as
subprime mortgages financed by the mortgage backed securities sold by Goldman and the other large
investment banks began to default, causing the world economy to descend into a liquidity crisis
and recession, Goldman asked to be allowed to convert itself into a bank holding company. As a
bank holding company, it was then allowed to borrow money from the federal government at
advantageous rates. The
36
Federal Deposit Insurance Company (FDIC) enabled Goldman to generate $29 billion in cash by
issuing FDIC insured debts through the Temporary Liquidity Guarantee Program. That program sought
to create liquidity by insuring debt issued by certain financial institutions such as the bank
holding company into which Goldman was permitted to convert. More directly, in the fall of 2008,
Goldman appealed to the federal government and accepted a $10 billion TARP loan to ensure its
survival. Because corporations such as Goldman that accepted TARP dollars were subject to oversight
by the federal government, were restricted on their ability to pay out generous compensation, and
were required to provide shareholders with an advisory vote on compensation policies (so-called
say-on-pay), Defendants announced the Companys intention to pay back the TARP loan as soon as it
could do so.
95. Goldmans management thus received federal assistance, shoring up Goldmans
over-leveraged balance sheet and putting it in a position to generate revenues as the world
economy emerged from the liquidity crisis and recession. Goldmans net revenues were also directly
subsidized by the federal government through its provision of assistance to AIG, from which
Goldman received $13 billion in satisfaction of certain financial contracts that AIG had with the
Company. This $13 billion in revenues, paid entirely from federal funds provided to AIG, created a
material percentage of the Companys 2009 net revenues from which the 2009 compensation would be
determined and paid.
96. Government funding was critical to the very survival of Goldman. On December 5, 2009,
U.S. Treasury Secretary Timothy Geithner revealed that Goldman
37
would not have survived without the generous financial assistance of the government: None of the
[largest banks] would have survived had the government stood aside and let the crisis run its
course. The entire U.S. financial system and all the major firms in the country... were at that
moment at the middle of a classic run, a classic bank run. But for the intervention, shareholders
would have suffered the consequences of the excessive risks that Goldmans officers and managers
placed upon shareholders equity
97. Unlike its competitors, Bear Stearns and Lehman Brothers, Goldman did not fail. Instead,
as a result of the massive government bailout of the excessive risks that Goldman had been taking
with its shareholder equity for the past several years, Goldman was placed in the fortuitous
position by the federal funding of simply being there when the economy began to recover. Its
massive shareholder equity, supplemented by the governments TARP capital infusion and the FDIC
loan guarantees, put it in a position to generate substantial net revenues in 2009. That
shareholder equity had been the prime driver behind Goldmans profits is demonstrated by the fact
that return on equity in 2009 was only half that in 2007. Without excessive and speculative
leverage of the shareholders capital, Goldmans managers and officers could not produce a return
on equity in 2009 that was comparable to prior years.
98. As of September 25, 2009, Goldman had generated net revenues of $35 billion, $28 billion
of which were from Trading and Principal Investments. Of that, the Defendants had reserved almost
$17 billion, or 49%, to be paid as compensation. While the shareholders equity contributed far
more to the generous of revenues in 2009 than in the past, the Defendants increased the proportion
of net revenues that they were going to
38
take from shareholders and give to themselves and the Companys employees.
99. On December 14, 2009, in response to a public outcry over its pay, Goldman announced
that its top 30 executives would receive no cash bonuses for 2009 and would be awarded
only stock that cannot be sold for five years. However, the changes are only for 2009 and
do not necessarily affect more than 31,000 other Goldman employees, consultants and
temporary workers, which includes traders and other employees who are fueling most of this
years revenue and profit surge, putting them in line for sharply higher bonuses early
next year. In addition, Goldman gave no indication that it will rein in overall pay
levels.
Goldman Overpays Management and Employees Based on Revenues
Generated By Risks Taken With Shareholder Capital
Generated By Risks Taken With Shareholder Capital
100. Since its IPO, Goldman Sachs has become increasingly dependent on its Trading and
Principal Investments segment to generate firm revenues. For example, in 1999, revenue from
Trading and Principal Investment accounted for just 43% of the Companys total revenues. By
2009, that segments revenue accounted for over 76% of Goldman Sachss revenues:
Net Revenues | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | |||||||||||||||||||||||||||||||||
Investment Banking |
5.5 | 3.8 | 2.8 | 2.7 | 3.3 | 3.6 | 5.6 | 7.5 | 5.1 | 4.8 | ||||||||||||||||||||||||||||||||||
Asset Management |
4.5 | 5.6 | 5.9 | 2.8 | 3.8 | 4.7 | 6.4 | 6.4 | 7.9 | 6.0 | ||||||||||||||||||||||||||||||||||
Trading and
Principal
Investments |
5.7 | 6.5 | 9.3 | 5.2 | 10.4 | 13.3 | 16.3 | 25.5 | 31.2 | 9.1 | 34.4 | |||||||||||||||||||||||||||||||||
Total Net Revenues |
13.3 | 16.6 | 15.8 | 13.9 | 16.0 | 20.9 | 25.2 | 37.6 | 45.9 | 22.2 | 45.2 |
39
101. Goldman Sachs reliance on revenues generated from Trading and Principal Investments
has at least one significant implication. Assets held by Goldman Sachs pursuant to its trading and
principal investments strategy are valued on a mark-to-market basis, meaning the market value of
the assets is continually assessed. Where the asset increases in value, revenue for Goldman Sachs
increases, and where the asset decreases in value, Goldman Sachs must book a loss.
102. Goldmans revenue in Trading and Principal Investments, therefore, is a function of the
amount of assets that Goldman has available to commit to the segment, which is in turn determined
by the leveraging of Goldmans shareholder equity. Goldman has been able to increase its revenues
in Trading and Principal Investments by increasing its shareholder equity and correspondingly
increasing the assets that are committed to that segment. Goldman is able to generate increasing
net revenues and compensation from Trading and Principal Investments by deploying an ever
increasing amount of shareholder capital to the segment. In 2009, almost all of the Companys
assets $662.75 billion were committed to the Trading and Principal Investments segment.
103. Notwithstanding the fact that an increasing amount of Goldmans net revenue and earnings
result from the increasing and risky deployment of shareholder equity and assets in the Trading
and Principal Investments segment, the proportion that Goldman has taken from net revenues to
compensate the managers of the shareholder equity has remained consistent. In both good years and
bad years, that proportion has stayed within a narrow range between 44% and 48% of net revenue.
Thus, for example,
40
in 2007, when the Company generated record revenues by taking excessive risks with
shareholders equity, the managers and officers of Goldman were paid 44% of net revenue.
In 2008, as the consequences of this speculative risk taking manifested itself, with the
value of Goldmans investments having plummeted and its share price having fallen, at one
point, by 75%, the Firms managers and officers were paid the identical 44% of revenue.
This year, in the face of an increasing amount of net revenues and earnings resulting from
the employment of shareholder equity, including capital provided by the taxpayers, in the
Trading and Principal Investments segment, the Company had retained the allocation of net
revenue to compensation at 47%, and it was only upon public outcry that it determined its
top 30 executives would only receive stock bonuses for 2009 rather than a mix of stock and
cash, that the percent of net revenues paid as compensation was reduced to nearly 36%. The
table below sets forth the percentage of net revenues allocated to compensation in each
year that Goldman was public.
1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2009 | |||||||||||||||||||||||||||||||||||||
(initial) | (actual) | |||||||||||||||||||||||||||||||||||||||||||||||
Net Revenue
(bn) |
13.3 | 16.6 | 15.8 | 14.0 | 16.0 | 21.0 | 25.2 | 37.7 | 46.0 | 22.2 | 35.5 | 45.2 | ||||||||||||||||||||||||||||||||||||
Comp. |
6.5 | 7.8 | 7.7 | 6.7 | 7.4 | 9.5 | 11.7 | 16.5 | 20.2 | 10.9 | 16.7 | 16.2 | ||||||||||||||||||||||||||||||||||||
Comp as %of
Rev. |
48 | % | 47 | % | 49 | % | 48 | % | 46 | % | 46 | % | 47 | % | 44 | % | 44 | % | 48 | % | 47 | % | 36 | % |
104. The amount of profit that Goldman allocates to compensation is even
higher after taking into account non-compensation expenses. The following table sets forth
Goldmans profit before compensation expenses (i.e., net revenues less non-compensation
related expenses) and the percentage of profit taken by management as compensation expense:
41
1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2009 | |||||||||||||||||||||||||||||||||||||
(initial) | (actual) | |||||||||||||||||||||||||||||||||||||||||||||||
Net Revenue
(bn) |
13.3 | 16.6 | 15.8 | 14.0 | 16.0 | 20.5 | 25.2 | 37.7 | 46.0 | 22.2 | 35.5 | 45.2 | ||||||||||||||||||||||||||||||||||||
Non-comp
expenses |
4.9 | 3.8 | 4.4 | 4.1 | 4.1 | 4.4 | 5.3 | 6.6 | 8.2 | 8.9 | 6.4 | 9.2 | ||||||||||||||||||||||||||||||||||||
Profit before
comp |
8.4 | 12.8 | 11.4 | 9.9 | 11.9 | 16.1 | 19.9 | 31.1 | 37.8 | 13.3 | 29.1 | 36 | ||||||||||||||||||||||||||||||||||||
Comp |
6.5 | 7.8 | 7.7 | 6.7 | 7.4 | 9.5 | 11.7 | 16.5 | 20.2 | 10.9 | 16.7 | 16.2 | ||||||||||||||||||||||||||||||||||||
Pre-Tax
profit |
1.9 | 5.0 | 3.6 | 3.2 | 4.4 | 6.6 | 8.2 | 14.6 | 17.6 | 2.4 | 12.4 | 19.8 | ||||||||||||||||||||||||||||||||||||
Comp as %of
Profit before
comp |
77 | % | 60 | % | 70 | % | 68 | % | 62 | % | 59 | % | 55 | % | 53 | % | 53 | % | 82 | % | 57 | % | 45 | % |
105. The consistent allocation of almost 50% of net revenue to the
compensation of the managers of shareholder capital vastly over-compensates the
employees for net revenues and earnings that are produced by the assets of the
Company, rather than the particular skill of its managers. The majority of Goldmans
revenue producing activity in Trading and Principal Investments is similar to that
of a hedge fund. Hedge fund managers have been criticized as being overcompensated
through the 2 and 20 compensation scheme 2% of net assets plus 20% of the net
income that they produce. Goldmans initial compensation allocation is equivalent to
compensating hedge fund managers at 2% of net assets plus 45% of net income, before
considering that compensation for hedge funds under the 2 and 20 structure
includes all of the overhead expenses for which Goldman shareholders pay separately.
Stated another way, Goldman
42
is managing the shareholders equity at the equivalent annual rate of 30% of net assets.
106. In todays market, no hedge fund manager may command compensation
for managing assets at the annual rate of 2% of net assets and 45% of net revenues. The
only hedge funds that have such compensation schemes are a few funds that have long
since closed to new investors and now consist almost exclusively of equity owned by the
managers themselves. To the extent that any hedge fund was ever able to command such
a compensation scheme, it did so only because it was able to outperform other hedge
funds to such a degree as to compensate for the higher fee structure.
107. No reasonable investor would commit funds to any manager, especially
one that undertakes the leverage and risk that Goldman undertakes, for a fee of 2% of net
assets and 45% of net revenue, and no reasonable director would approve any
compensation scheme that provided the managers of shareholder capital with
compensation equivalent to that. This is particularly so because the managers and
officers of Goldman have not performed at a level even remotely sufficient to justify such
a fee. To the contrary, since its initial public offering in 1999, Goldman has been able to
outperform the hedge fund indices only by engaging in excessive leverage. On a risk
adjusted basis, during this period, Goldmans performance has, in fact, been inferior to
the indices of hedge funds, and, as a consequence, the excessive share of Goldmans
profits that its managers and officers take as compensation bears no reasonable relation to
their actual performance. There is no basis the Director Defendants to pay the Company
officers and managers a portion of net revenues that is more than double that paid to
professionals performing comparable services when such officers and managers are
43
performing at an inferior standard.
108. This excessive risk taking by Goldmans managers and officers, with shareholder equity
rather than their own, benefits them to a far greater degree than it does shareholders,
notwithstanding the purported effort by Goldmans Board to align the interest of management with
that of the shareholders. As the graph below graph reflects, the interests of the two groups are
not aligned, with shareholders bearing all of the risks, yet reaping little reward.
44
109. Since January 1, 2007, the share price of Goldman common stock has
declined. Nevertheless, in two of the three years during which the value of shareholders
investment had diminished, Goldmans managers and officers were awarded record
bonuses.
110. Further, while generously gifting enormous and unjustifiable proportions
of the net revenues earned by the shareholders assets to the managers of those assets, the
Director Defendants returned little of those revenues to the owners of the assets
themselves. In doing so, they have accumulated shareholder equity, which in turn is used
to produce ever increasing net revenues and compensation for management. The
following table sets forth the amount of net revenues returned to the shareholders in the
form of dividends, in comparison to the amount paid to management as compensation:
1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||||||||||||||||||||
Net Revenue
(bn) |
13.3 | 16.6 | 15.8 | 14.0 | 16.0 | 21.0 | 25.2 | 37.7 | 46.0 | 22.2 | 45.2 | |||||||||||||||||||||||||||||||||
Comp |
6.5 | 7.8 | 7.7 | 6.7 | 7.4 | 9.5 | 11.7 | 16.5 | 20.2 | 10.9 | 16.2 | |||||||||||||||||||||||||||||||||
Comp
as % of
Net Rev. |
48 | % | 47 | % | 49 | % | 48 | % | 46 | % | 46 | % | 47 | % | 44 | % | 44 | % | 48 | % | 36 | % | ||||||||||||||||||||||
Dividends
(bn) |
0.11 | 0.21 | 0.23 | 0.23 | 0.35 | 0.50 | 0.49 | 0.61 | 0.64 | 0.64 | .55 | |||||||||||||||||||||||||||||||||
Dividends as
% of net rev. |
0.8 | % | 1.2 | % | 1.4 | % | 1.6 | % | 2.2 | % | 2.4 | % | 1.9 | % | 1.6 | % | 1.4 | % | 2.9 | % | 1.2 | % |
45
111. By failing to distribute any reasonable proportion of net revenues to the
owners of the equity that generates those revenues, Defendants have favored and
benefitted management over the interest of the shareholders. Any amounts of net
revenues that are not paid to shareholders increase the capital of the Company, and
increase the ability of the Company to generate net revenues, from which the Defendants
pay an exorbitant and unreasonable amount as compensation to management. This
endless cycle of allocating far too great a proportion of net revenues to management, and
returning little or none of it to shareholders, has created an ever increasing pool from
which management is increasingly over-compensated year after year.
Goldman Decides To Give Away Yet More Shareholder Money
112. Goldmans revelation in November 2009, that it intended to set aside $17
billion in net revenues for the first three quarters as compensation for management
prompted widespread criticism from shareholders, the government, and the public.
113. In mid-November, Defendant Blankfein defended Goldmans enormous
profits and intended compensation by asserting that Goldman was doing Gods work.
A week later, he apologized for Goldman, stating [w]e participated in things that were
clearly wrong and have reason to regret...we apologize. As part of that apology,
Goldman committed to spending $500 million to help small businesses recover from the
recession.
114. Goldmans management, as part of its apology for taking enormous
bonuses resulting from its fortuitous revenues in 2009, has determined to give away yet
more shareholder money. While this $500 million came from the compensation pool,
46
instead of keeping the money in the Company or declaring additional dividends
to the shareholders, this commitment of shareholder funds constitutes a waste of the shareholders
equity.
115. The excessive compensation of Goldman management has inflamed the
public and resulted in increased government scrutiny not just of compensation practices
but of the Companys activities in general. As a result of the proposed excessive
compensation, the government is now proposing to impose a fee aimed at raising $90
billion over ten years from the nations 50 largest banks. It is projected that Goldman
will be required to pay $1.17 billion annually to the government, more than it has ever
paid in dividends to its own shareholders. This fee will tax Goldmans profits even
further, thus punishing the shareholders for the actions taken by Defendants to over-compensate management.
DERIVATIVE AND DEMAND ALLEGATIONS
116. Plaintiffs bring this action derivatively, in the right and for the benefit of
Goldman, to redress the breaches of fiduciary duty and other violations of law by
Defendants. Plaintiffs will adequately and fairly represent the interests of Goldman and
its shareholders in enforcing and prosecuting its rights.
117. Plaintiffs have not made a demand upon the Board of Goldman to take
remedial action on behalf of Goldman against the Defendants, because the Board
participated in, approved, and/or permitted the wrongs alleged herein and is not
disinterested and lacks sufficient independence to exercise business judgment.
118. The Board currently consists of the following twelve (12) individuals:
47
Defendants Blankfein, Cohn, Bryan, Dahlback, Friedman, George, Gupta, Johnson,
Juliber, Mittal, Schiro, and Simmons. Of these, all twelve Director Defendants are either named
executive officers who took an active role in overseeing the Firms trading segment, including its
mortgage unit which employed an unethical trading strategy for its benefit and to the detriment of
its clients (Blankfein and Cohn), or were members of the Audit Committee charged in assisting the
Board in its oversight of the Companys management of market, credit, liquidity and other
financial and operational risks (Bryan, Dahlback, Friedman, George, Gupta, Johnson, Juliber,
Mittal, Schiro, and Simmons).
119. The entire Board is also disabled from acting on a demand because each Director Defendant
was fully aware of, or should have been aware, in breach of their fiduciary duties, the details of
the trading business of Goldman and failed to take appropriate action based on such actual or
constructive knowledge. According to a Memorandum dated April 26, 2010 from Senators Carl Levin and
Tom Coburn to the Members of the Permanent Subcommittee on Investigations and entitled Wall Street
and the Financial Crisis: The Role of Investment Banks (Permanent Subcommittee Report) the
Goldman Board was fully aware of the extent of Goldmans RMBS and CDO securities market activities:
In addition to RMBS securities, Goldman Sachs was active in the CDO market. A
September 2007 internal presentation to its Board of Directors listed Goldman
Sachs as the fourth largest CDO underwriter in the country, with 14 CDO
transactions in 2006 involving $16 billion, and 12 deals in the first half of
2007, involving $8.3 billion. These transactions included about 16 CDOs on the
Abacus platform, involving over $10 billion in referenced assets; Hudson CDO
involving $2 billion, a $300 million Anderson CDO, and a $1 billion Timberwolf
CDO.
48
Report at p. 7, citing to Presentation to GS Board of Directors, Residential Mortgage
Business, 9/17/07.
120. At that same September 17, 2007 Presentation to the Board, the Board was
informed of a number of actions taken during the year, including shorted synthetics
and Shorted CDOs and RMBS. Id. These actions were an intensive effort to not only
reduce its mortgage risk exposure, but profit from high risk RMBS and CDO Securities
incurring losses. Id.
121. Therefore, the Board was aware that Goldmans trading activities involved
intensive shorting of the residential mortgage and synthetic financial products markets.
The Board also understood that these efforts involved very large amounts of Goldmans
capital that exceeded the Companys Value-at-Risk measures:
At times, the net short position accumulated by Goldman Sachs was as large as
$13.9 billion. The short positions held by the firms mortgage department became
so large that according to the Goldman Sachs risk measurements, the positions
comprised 53 percent of the firms overall risk, according to Goldman Sachs own
Value-at-Risk (VaR) measures. Senior management had to repeatedly allow the
mortgage department to exceed the VaR limits that had been established by the
firm.
Id. At p. 8, citing Goldman Sachs Market Risk Report, 8/14/07
122. The Board also countenanced the issuance of substantively false and
misleading statements by Goldmans executives about the Companys conduct with
respect to the synthetic CDO products. The Permanent Subcommittee Report, at page 8, states:
The 2009 Goldman Sachs annual report states that the firm did not generate
enormous net revenues by betting against residential related products. Documents
obtained by the Subcommittee, however, indicate otherwise. Two top Goldman
mortgage traders, Michael Swenson and
49
Joshua Birnbaum, discussed in their 2007 performance
self-evaluations the Very profitable year and extraordinary profits that came
from shorting the mortgage market that year. One bragged about aggressively
entering into efficient shorts in both the RMBS and CDO space, while the other
reported that contrary to the prevailing opinion that the firm needed only to
get close to home. He concluded that we should not only get flat, but get VERY
short. Goldman Sachs documents show that the firm was short in the mortgage
market throughout 2007, and that, twice in 2007, it established and then cashed in
very large short positions in mortgage related securities, generating billions of
dollars in gross revenues.
123. The Board either knew or, in breach of its fiduciary duties, should have been aware of
the following conduct, which the Permanent Subcommittees investigation concluded as its findings
of fact:
(1) Securitizing High Risk Mortgages. From 2004 to 2007, in exchange for
lucrative fees, Goldman Sachs helped lenders like Long Beach, Fremont, and New
Century, securitize high risk, poor quality loans, obtain favorable credit ratings
for the resulting residential mortgage backed securities (RMBS), and sell the RMBS
securities to investors, pushing billions of dollars of risky mortgages into the
financial system.
(2) Magnifying Risk. Goldman Sachs magnified the impact of toxic mortgages on
financial markets by re-securitizing RMBS securities in collateralized debt
obligations (CDOs), referencing them in synthetic CDOs, selling the CDO securities
to investors, and using credit default swaps and index trading to profit from the
failure of the same RMBS and CDO securities it sold.
(4) Shorting the Mortgage Market. As high risk mortgage delinquencies increased,
and RMBS and CDO securities began to lose value, Goldman Sachs took a net short
position on the mortgage market, remaining net short throughout 2007, and cashed
in very large short positions, generating billions of dollars in gain.
(5) Conflict Between Client and Proprietary Trading. In 2007, Goldman Sachs went
beyond its role as market maker for clients seeking to buy or sell mortgage
related securities, traded billions of dollars in mortgage related assets for the
benefit of the firm without disclosing its proprietary positions to clients, and
instructed its sales force to sell mortgage related assets, including high risk
RMBS and CDO securities
50
that Goldman Sachs wanted to get off its books, creating a conflict between
the firms proprietary interests and the interests of its clients.
(6) Abacus Transaction. Goldman Sachs structured, underwrote, and sold a synthetic
CDO called Abacus 2007-AC1, did not disclose to the Moodys analyst overseeing the
rating of the CDO that a hedge fund client taking a short position in the CDO had
helped to select the referenced assets, and also did not disclose that fact to other
investors.
(7) Using Naked Credit Default Swaps. Goldman Sachs used credit default swaps
(CDS) on assets it did not own to bet against the mortgage market through single name
and index CDS transactions, generating substantial revenues in the process.
Permanent Subcommittee Report, at pp. 12-13.
124. As a result of the Director Defendants utter failure to monitor and oversee the Firms
operations, allowing the Firm to manage and conduct the Firms trading segment in an grossly
unethical manner, subjecting Goldman to potential civil liability and severe reputational harm, the
Director Defendants are subject to liability for breaching their fiduciary duties to Goldman by,
inter alia, failing to act in any manner whatsoever to detect, prevent and/or halt these practices.
125. Moreover, a majority of the Director Defendants also have significant financial
relationships with Goldman and therefore cannot act independently of its management in making
determinations concerning the compensation of management or decisions that ultimately affect
the compensation of management, such as the determination of the amount of dividends to
distribute to shareholders. Of the twelve Director Defendants, eight, or a majority, are either
management employees (Blankfein and Cohn), or have excessive financial relationships with the
private Goldman Sachs Foundation (the Foundation), controlled by Goldman management, and
therefore
51
cannot act independently in decisions affecting managements compensation.
126. The Foundation is a New York not-for-profit corporation that was organized by the
Company in 1999, and since then has been funded only by the Company. The Foundation is an exempt
organization under 26 U.S.C. § 501(c)(3), but it is not a public charity subject to any meaningful
outside oversight.
127. The Foundation is controlled by the Companys management, and its funding comes solely
from the Company. The Foundation maintains its offices in the Companys principal place of
business at 85 Broad Street, New York, New York. The Foundations president, Stephanie Bell-Rose,
is a managing director of the Company. The Foundations board of trustees has eight members.
According to its filing with the New York Attorney Generals Charities Bureau on October 20, 2008,
the members of that board are John C. Whitehead, Thomas W. Payzant, Frank H. T. Rhodes, Neil
Rudenstine, Josef Joffe, Stuart Rothenberg, John F. W. Rogers, and Glenn Earle. Four of these
trustees are or were managing directors of the Company.
128. Six of the ten non-employee directors on the Companys Board, Defendants Bryan,
Friedman, Gupta, Johnson, Juliber, and Simmons, are members of boards of exempt organizations to
which the Foundation has made substantial donations as alleged below.
129. In 1994, 1997, and 2000, Defendant Bryan was co-chairman of the annual meetings of the
World Economic Forum. He chaired a successful campaign to raise $100 million to renovate the
Chicago Lyric Opera House and Orchestra Hall, to which the Company has made substantial
contributions. He is a life trustee of the University of
52
Chicago, to which the Foundation donated $200,000 in 2006 and allocated another $200,000 in
2007. As a trustee of the University, it is part of his job to raise money for it.
130. Defendant Johnson is and was in 2006 an honorary trustee of the Brookings Institution, to
which the Foundation donated $100,000 in 2006. As an honorary trustee, it was part of Johnsons
job to raise money.
131. Defendant Gupta is the chairman of the board of the Indian School of Business in
Hyderabad, India. Since 2002, the Foundation has donated at least $1,600,000 to the Friends of
the Indian School of Business. Defendant Gupta is also a member of the deans advisory board of
Tsinghua University School of Economics and Management in Beijing, China. Since 2002, the
Foundation has donated at least $3,500,000 to the Friends of Tsinghua School of Economics and
Management. Mr. Gupta is a member of the United Nations Commission on the Private Sector and
Development, and he is a special adviser to the UN Secretary General on UN Reform. Since 2002, the
Foundation has donated at least $1,665,000 to the Model UN program. As a member of these boards and
this commission, it is part of Guptas job to raise money for these institutions.
132. The Company has invested at least $670 million in funds managed by Defendant Friedman.
In addition, Defendant Friedman is an emeritus trustee of Columbia University. As such, it is part
of his job to raise money for the university. Since 2002, the Foundation has donated at least
$640,000 to support an MBA business plan competition and education program at Columbia University.
In 2007, the Foundation allocated another $125,000 to Columbia University.
53
133. Defendant Juliber is a member of the board of Girls Incorporated, to which the
Foundation allocated $400,000 in donations and paid $200,000 in 2006 and 2007. As a member of its
board, it is part of Julibers job to raise money for it.
134. As president of Brown University, it is part of Defendant Simmons job to raise money for
the university. The Foundation has pledged funding in an undisclosed amount to share in the support
of a position of Program Director at The Swearer Center for Public Service at Brown University. The
Foundation allocated $100,000 in 2006 and paid $100,000 in 2007 to this project.
135. Defendants Bryan, Friedman, Gupta, Johnson, Juliber, and Simmons have all been assisted
in their charitable fund raising responsibilities by contributions from the Foundation, which is
funded by the Company and controlled by the Companys management. The Foundations contributions
to their fund raising responsibilities were material. The SEC views a contribution for each
director to be material if it equals or exceeds $10,000 per year. 17 C.F.R. § 229.402(k)(2)(vii)
and Instruction 3 thereto. They, too, are interested and lack independence. A total of eleven of
the twelve Board members are interested and lack independence.
136. In addition, two of the ten non-employee directors have substantial financial
relationships with Goldman that prevents them from acting independently in any decision concerning
compensation of management.
137. Defendant Dahlback has a degree in economics and is a senior adviser to Investor AB,
based in Sweden, and was an executive director of Thisbe AB, an
54
investment company owned by the Wallenberg Foundations. The Company has invested more than
$600 million in funds to which Mr. Dahlback is an adviser.
138. Defendant Mittal is the chairman and chief executive officer of
ArcelorMittal. Goldman has arranged or provided billions of euros in financing to his company.
During 2007 and 2008 alone, the Company had made loans to ArcelorMittal in the aggregate amount of
464 million euros.
139. As a consequence, ten of the twelve members of the Board either are management or have
financial relationships with Goldman that prevent them from acting independently on any decision
that affects compensation of management.
140. A majority of the Board, therefore, is not independent and cannot act independently with
respect to the claims made in this action. Demand on the Board, therefore, would be futile.
COUNT I
DERIVATIVELY AGAINST DIRECTOR DEFENDANTS FOR WASTE
141. Plaintiffs repeat and reallege each and every allegation above as if set forth in full
herein.
142. The Defendants are liable for waste for approving a compensation ratio to Goldman
employees in an amount so disproportionately large to the contribution of management, as opposed to
capital as to be unconscionable.
143. No person acting in good faith on behalf of Goldman consistently could approve the
payment of between 44% and 48% of net revenues to Goldmans employees year in and year out when
those revenues were generated predominantly by the
55
shareholders equity and not by the work or diligence of management. Thus, to consistently
allocate 44% to 48% of net revenues to compensation constitutes waste.
144. In particular, the initial allocation of 47% of net revenues to and ultimate payment of
36% of net revenues for compensation for 2009, a year in which those revenues were generated
largely because of the size and availability of Goldmans capital, and in spite of the
inappropriate and unjustified risk and leverage undertaken by its management over the last several
years, is unconscionable. No reasonable director would approve such a massive allocation of net
revenues to the compensation of management in these circumstances.
145. Goldman and its stockholders have suffered and will continue to suffer harm as a result
of the Defendants wasteful conduct.
COUNT II
DERIVATIVELY
AGAINST DEFENDANTS FOR BREACH OF FIDUCIARY DUTIES
146. Plaintiffs repeat and reallege each and every allegation above as if set forth in full
herein.
147. The Defendants owed and owe Goldman fiduciary obligations. By reason of their fiduciary
relationships, the Defendants owed and owe Goldman the highest obligation of loyalty to act in good
faith.
148. Defendants violated and breached their fiduciary duties of loyalty, reasonable
inquiry, oversight, good faith and supervision.
149. The Director Defendants also each owed a duty to Goldman to test, oversee and monitor its
practices and to ensure that they were functioning in an effective
56
and ethical manner.
150. Given the nearly $11 billion in securities Goldman issued in the inherently risky
subprime mortgage market and the widespread discussion with respect to the housing bubble, it is
clear that the Director Defendants stood by while Goldman advised and allowed its clients to invest
good dollars after bad. The Companys Board of Directors utterly failed to monitor its
operations, allowing the Firm to manage and conduct the Firms trading segment in an grossly
unethical manner, resulting in excessive payment of Goldmans ill-gotten profits to its employees
and subjecting Goldman to potential civil liability, severe reputational harm, and long-term and
detrimental financial harm. Instead, the Board remained supine and took no substantive action to
address its exposure to grossly unethical practices. In short, those responsible for ensuring
that Goldman not mortgage the future and the reputation of the Company for short-term gains utterly
failed to properly fulfill their duties.
151. Thus, the Director Defendants utter lack of proper supervision and oversight of
Goldmans unethical trading operations practices, in the face of its multi-billion of dollar
securities created and sold, caused the Company to suffer significantly reduced market
capitalization, outrage from the general public and government officials, withering criticism from
industry analysts, and significantly reduced reputational capital.
152. Consequently, the Director Defendants are liable to the Company for abandoning and
abdicating their responsibilities and fiduciary duties with regard to prudently managing the assets
and business of Goldman in a manner consistent with the operations of a publicly held corporation;
causing damage to the Companys reputational
57
capital; and exposing the Company to civil liability.
153. Defendants also had a fiduciary duty to assess continually Goldmans compensation scheme
to ensure that it reasonably compensated employees and reasonably allocated the profit of
Goldmans activities according to the contributions of shareholder capital and the employees of the
Company.
154. As Goldmans business has evolved into one that is dominated by the direct investment of
shareholder assets into various debt and equity securities, as well as real estate, the Defendants
have never analyzed or assessed the extent to which management performance, as opposed to the
ever-growing shareholder equity and assets available for investment, has contributed to the
generation of net revenues. Nor have Defendants ever assessed how other comparable managers of
shareholder funds, such as hedge fund managers, are compensated in comparison to Goldmans
management. When compared to such comparable investment operations, Goldman allocates an excessive
and exorbitant proportion of its net revenues to compensation.
155. Rather than assess Goldmans compensation practices in the face of the increasing
contribution of shareholder equity to the generation of net revenues, Defendants have simply
applied the traditional compensation ratio to allocate net revenues to management. Moreover, by
failing to pay any significant part of net revenues to the shareholders in the form of dividends,
Defendants have further breached their duty of loyalty and good faith and have exacerbated the
overcompensation of Goldmans management.
156. Defendants failure to assess and analyze the compensation of
58
management in light of the changing nature of its business, but rather to continue practices
that overcompensate management and in fact exacerbate the overcompensation, constitutes an
abdication of Defendants fiduciary duty to the harm of the shareholders.
157. As a further result of Defendants breach of fiduciary duty, the shareholders of
Goldman will be further charged by Goldmans contribution of $500 million to a small business
program as an apology for the over-compensation of management.
158. In addition, on January 14, 2010, President Barack Obama announced his proposal for a new
tax on the nations largest financial institutions, saying he wanted to recover every single dime
the American people are owed for bailing out the economy. The Presidents proposal was spurred by
and coincided with large financial institutions, including Goldmans, much-publicized plans to pay
themselves huge bonuses. The estimated annual fee that Goldman will pay under the Presidents
proposal is nearly $1.2 billion.
159. The
President also told Goldmans executives, among others, that [i]nstead of
sending a phalanx of lobbyists to fight this proposal or employing an army of lawyers and
accountants to evade the fee, I suggest you might want to consider simply meeting your
responsibilities including rolling back bonuses.
160. Goldman and its stockholders have suffered and will continue to suffer irreparable harm
as a result of the Defendants breach of fiduciary duty.
59
PRAYER FOR RELIEF
WHEREFORE, Plaintiffs demands judgment as follows:
A.
Determining that its suit is a proper derivative action and certifying Plaintiffs as
appropriate representatives of Goldman for said action;
B.
Declaring that each of the Director Defendants have breached his or her fiduciary duties to
Goldman in connection with their duty of oversight;
C.
Ordering the Director Defendants, and those under their supervision and control, to
implement and enforce policies, practices and procedures on behalf of Goldman and its stockholders
that are designed to detect and prevent illegal and unethical conduct by Goldmans employees and
representatives;
D.
Declaring that each of the Director Defendants has breached his or her fiduciary duties to
Goldman in connection with the allocation of between 44% and 49% of the Companys net revenues to
compensation of its employees, and that such allocations vastly over-compensate management and
constitute corporate waste;
E.
Enjoining the Director Defendants from allocating 47% of the net revenues from 2009 to
compensation, requiring Defendants to analyze the contributions of the shareholder equity and firm
assets as compared to management efforts in the production of those net revenues, and prohibiting
the allocation of net revenues to compensation on any basis that is in excess of such allocation
for comparable tasks in the comparable management of investor funds;
60
F.
Requiring the Director Defendants to ensure that the cost of any charitable contributions
committed by Goldman to apologize for the enormous compensation of its employees and the cost of
any fee imposed by the government on banks are borne by the management of Goldman, rather than the
shareholders;
G.
Directing each of the Director Defendants to account to the Company for all damages
sustained or to be sustained by the Company as a result of the Director Defendants breaches of
fiduciary duties and waste of corporate assets;
H. Awarding damages, together with pre- and post-judgment interest to the Company, against
the Director Defendants resulting from the overpayment of compensation from net revenues of the
Company;
I. Awarding damages, together with pre- and post-judgment interest to the Company, against
the Director Defendants to make shareholders whole for any charitable contributions that Goldman
makes to apologize for its compensation policies and any fee imposed by the federal government
on Goldman as a result of the attention that its over-compensation of employees in 2009 has
attracted;
J. Awarding to Plaintiffs the costs and disbursements of the action, including reasonable
attorneys fees, accountants and experts fees, costs, and expenses; and
K. Granting such other and further relief as the Court deems just and proper.
Dated:
April 28, 2010
|
CHIMICLES & TIKELLIS LLP | |||
/s/ Pamela S. Tikellis
|
||||
Robert J. Kriner. (#2546) | ||||
Tiffany J. Cramer (#4998) | ||||
222 Delaware Avenue, Suite 1100 |
61
P.O. Box 1035
Wilmington, DE 19801
Phone: (302) 656-2500
Fax: (302) 656-9053
Wilmington, DE 19801
Phone: (302) 656-2500
Fax: (302) 656-9053
Co-Lead Counsel for Plaintiffs
OF COUNSEL:
CHITWOOD HARLEY HARNES LLP
John F. Harnes
2300 Promenade II
1230 Peachtree Street
Atlanta, GA 30309
(404) 873-3900
CHITWOOD HARLEY HARNES LLP
John F. Harnes
2300 Promenade II
1230 Peachtree Street
Atlanta, GA 30309
(404) 873-3900
Co-Lead Counsel for Plaintiffs
62