When a publicly-traded company advertises itself as having ethical principles and strong internal fraud controls, do those statements affect share prices? If they do, should shareholders who relied on the statements have access to class-action lawsuits?
The question is currently before the U.S. Supreme Court. A group of investors, including the Arkansas Teacher Retirement System and other pensions, purchased shares of Goldman Sachs between February 2007 and June 2010.
These shareholders claim that they relied on Goldman’s statements that the bank upholds ethical principles and has internal controls against conflicts of interest. The bank pledged that its “clients’ interests always come first.”
Later on, however, it was revealed that Goldman had concealed an internal conflict of interest when it sold subprime securities before the 2008 financial crisis. The shareholders claim that this demonstrated the bank’s statements had violated an anti-fraud provision of the Securities Exchange Act of 1934 and associated regulations by the Securities and Exchange Commission.
Interestingly, Goldman does not dispute that it made the statements in question. It argues, however, that the statements were merely “aspirational” and thus too generic to affect share prices.
The justices struggle to interpret the statements
How would a court determine if statements are specific enough to affect share prices? The Supreme Court justices appeared to struggle with that question.
For example, according to Reuters, Justice Brett Kavanaugh asked an attorney for Goldman, “How are you defining generic or, stated otherwise, what kinds of statements are not generic?”
On the other hand, Chief Justice John Roberts described a hypothetical situation where a company described itself as “nice.” “There are people who would regard, ‘We are a nice company,’ as a fraudulent statement depending upon subsequent events, and how would they make that case?”
The plaintiffs say they lost money due to Goldman’s lack of internal controls
The plaintiffs point to Goldman’s sale of collateralized debt obligations before the 2008 economic downturn. Goldman hedge fund manager John Paulson settled an SEC probe for $550 million after the agency claimed Goldman concealed Paulson’s role in the sale, even though he himself made $1 billion by betting against the sale.
If the truth had been known that Paulson had a substantial conflict of interest, the plaintiffs say, Goldman’s share prices would have been lower. They claim they lost over $13 billion due to Goldman’s concealment of Paulson’s role.
The Supreme Court is expected to rule on the case by the end of June.
Whenever investors are misled by company statements, there is a possibility that they could be harmed financially. In such a case, securities law attorneys may be able to hold the company accountable.
