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Goldman Sachs' (GS) Plea to Dismiss Class-Action Lawsuit Gets SC Nod

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Goldman Sachs’ (GS - Free Report) request to dismiss a class-action lawsuit that was filed by its shareholders has been awarded a victory by the U.S. Supreme Court. The lawsuit accuses the company of hiding conflicts of interest, while creating risky subprime securities back in 2008.

Plaintiffs claimed that Goldman Sachs controlled an artificially-inflated stock price by repeatedly making false and misleading public affirmations about being cautious of avoiding conflicts of interest. They said that those pledges proved distorted when the Securities and Exchange Commission (SEC) prosecuted the bank in April 2010 over its portfolio Abacus. Goldman Sachs had reached a $550-million settlement with the SEC to resolve allegations of conning Abacus investors into concealing the role of hedge fund manager, John Paulson, including how he made profits worth $1 billion, by betting on the failure of sale of those secured debt securities.

As per the plaintiffs’ inflation-maintenance theory, Goldman Sachs’ alleged misrepresentations caused its stock price to remain amplified until the market reacted to the truth about the bank’s practices, after which its shares tumbled and the plaintiffs suffered losses. Goldman Sachs’ investors from February 2007 to June 2010, including The Arkansas Teacher Retirement System, claimed to have suffered losses of more than $13 billion due to the bank’s misdeeds.

Nonetheless, the Supreme Court judges have now said that the New York-based 2nd U.S. Circuit Court of Appeals failed to properly review if or not Goldman Sachs’ disputed statements were too generic to have impacted its share price. Hence, it has directed the lower court to reassess the case. The Court’s proposal converges on its rules designed to conclude whether or not shareholders have enough in common with one another to press a class action suit.

However, the court rejected Goldman Sachs’ plea to raise the bar for shareholders by declining the bank’s argument that plaintiffs should be obligated to persuade the court of alleged misstatements affecting the stock price.

Goldman Sachs noted that it should be able to meet the requirement of portraying its assurances about conflicts on being so “generic” that they could not be responsible for boosting the stock price. The statements included promises in regulatory filings that the firm had “extensive procedures and controls that are designed to identify and address conflicts of interest” and that “our clients’ interests always come first.”

A spokeswoman for Goldman Sachs, Maeve DuVally, noted in an e-mailed statement, “We are pleased the Supreme Court has vacated the grant of class certification and we will continue to vigorously defend ourselves as the case returns to the lower courts.”

Writing for the high court, Justice Amy Coney Barrett remarked that both sides in the case have agreed that “the generic nature of a misrepresentation often will be important evidence of a lack of price impact. It is unclear whether the 2nd Circuit properly considered the generic nature of Goldman’s alleged misrepresentations.”

Bottom Line

Though Goldman has resolved quite a few litigation issues, it still faces probes and queries from a number of federal agencies, and a few foreign governments for the bank’s businesses conducted during the pre-crisis period. In fact, recently, it was sued by J. Garcia Carrion for alleged unauthorized currency trades that cost the Spanish firm millions of euros. (Read more: Goldman in Murky Waters Over Speculative Spanish Trades)
As a result, the company’s legal expenses are expected to remain elevated, which might partially impede its bottom-line growth in the near term.

The stock has gained 39.4% over the past six months, outperforming the industry’s rally of 28.2%.

Zacks Investment ResearchImage Source: Zacks Investment Research

Currently, Goldman carries a Zacks Rank #3 (Hold).

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