Case 1:10-cv-03595-UA Document 1 Filed 04/30/2010 Page 1 of 43
UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK
TIKVA BOCHNER, On Behalf of Herself - a [^^
and All Others Similarly Situated,
Plaintiffs, Civil Action
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GOLDMAN SACHS GROUP, INC., LLOYD .JURY TRIAL D l^A1VDEI^
C. BLANKFEIN, DAVID A. VINIAR and
GARY D. COHN,
CLASS ACTION COMPLAINT
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TABLE OF CONTENTS
I. NATURE OF THE ACTION I
II. JURISDICTION AND VENUE I
III. PARTIES I
IV. BACKGROUND 3
V. FALSE AND MISLEADING STATEMENTS 8
VI. THE TRUTH IS REVEALED 22
VII. CLASS ACTION ALLEGATIONS 32
VIII. NO SAFE HARBOR/ADDITIONAL SCIENTER ALLEGATIONS 34
IX. LOSS CAUSATION/ECONOMIC LOSS 36
FIRST CAUSE OF ACTION 37
SECOND CAUSE OF ACTION 38
RELIEF REQUESTED 38
JURY DEMAND 39
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Plaintiff has alleged the following based upon the investigation of Plaintiff's counsel,
which included a review of United States Securities and Exchange Commission ("SEC") filings by
Goldman Sachs Group, Inc. ("Goldman" or the "Company" or the "Firm"), as well as regulatory
filings and reports, court filings, press releases and other public statements issued by the
Company, Congressional hearings and testimony by Company officials, and media reports about the
I. NATURE OF THE ACTION
1. This is a federal securities class action pursuant to Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 ("Exchange Act"), on behalf of all persons or entities who
purchased Goldman call options or sold Goldman put options between August 5, 2009 and April
16, 2010 (the "Class Period"), and suffered dainages thereby.
11. JURISDICTION AND VENUE
2. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of
the Exchange Act (15 U.S.C. §§78j(b) and 78t(a)) and Rule l Ob-5 promulgated thereunder (17
3. This Court has jurisdiction over this action pursuant to Section 27 of the Exchange
Act (15 U.S.C. §78aa), and 28 U.S.C. §§1331 and 1337.
4. Venue is proper in this District pursuant to 28 U.S.C. §1391, because Goldman's
principal place of business is in this District, and a substantial part of the events or omissions
giving rise to Plaintiffs claims occurred in this District.
5. Plaintiff Tikva Bochner, as set forth in the accompanying certification attached
hereto and incorporated by reference, traded in Goldman options during the Class Period and
was damaged thereby.
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6. Defendant Goldman is a financial holding company that provides global
investment banking, securities and investment management services in the United States and
internationally. Goldman is headquartered in New York, New York. Goldman's principal
United States broker-dealer is Goldman Sachs & Co. Goldman common stock is traded on the
New York Stock Exchange (NYSE). Its options trade on the Chicago Board Options Exchange
(OBOE), the world's largest options exchange.
7. Defendant Lloyd C. Blankfein ("Blankfein") is the Chairman of the Board of
Directors and Chief Executive Officer of Goldman. Blankfein participated in the issuance of
false and misleading statements, including those filed with the SEC, described below.
8. Defendant David A. Viniar ("Viniar") is the Executive Vice President and Chief
Financial Officer of Goldman. Viniar participated in the issuance of false and misleading
statements, including those filed with the SEC, described below.
9. Defendant Gary D. Cohn ("Cahn") is the President and Chief Operating Officer
of Goldman, and a member of the Board of Directors. Cohn participated in the issuance of false
and misleading statements, including those filed with the SEC, described below.
10. Defendants Blankfein, Viniar and Cohn are collectively referred to herein as the
11. The Individual Defendants, by reason of their management positions and
ownership of the Company's securities, were at all relevant times controlling persons of
Goldman within the meaning of Section 20(a) of the Exchange Act. The Individual Defendants
had the power and influence to cause Goldman to engage in the unlawful acts and conduct
alleged herein, and did exercise such power and influence.
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12. At all times during the Class Period, Goldman and the Individual Defendants
repeatedly emphasized the importance of Goldman's reputation as a necessary requirement for
its survival and represented that the Company's core goal was its "unwavering commitment to
client service." January 21, 2010, Goldman fourth quarter 2009 Earnings Call, Similarly,
Goldman acknowledged that additional regulation or legislative limitations on its business and
goveriunental investigations posed material risks to its business.
13. Through the actions described herein, Goldman put its vaunted reputation at grave
risk. It misrepresented and failed to disclose the substance of certain transactions that ran
contrary to its disclosures about reputation, integrity and client relationships. Specifically,
Goldman was selling to its clients the same securities that it was privately calling "crappy" or
"shitty" and that it was heavily shorting. As Senator Carl Levin told Lloyd Blankfein at an April
17, 2010 Senate Hearing on the causes of the financial crisis. "You are betting against the same
security you're out selling ... [and] you don't think the client would care?" Goldman "profited
by taking advantage of its clients' reasonable expectation that it would not sell products that it
didn't want to succeed, and that there was no conflict of economic interest between the film and
the customers it had pledged to serve."
14. The facts underlying Goldman's situation relate to the structuring of a complex
credit derivative transaction in 2007. In 2006, hedge fund Paulson & Co. Inc. anticipated that the
housing market bubble would burst and began shorting (or betting against) the performance of
securities backed by subprime residential mortgage loans, known as residential mortgage-backed
securities ("RMBS"). One of Paulson's methods for shorting the RMBS market was to buy a
type of over-the-counter derivative contract, known as a credit default swap ("CDS"), which
provides credit protection (like an insurance payout) to the buyer (the "protection buyer") in the
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event that the specific RMBS referenced in the swap agreement experiences negative credit
events or defaults. In exchange for this protection, the buyer makes regular payments over a
fixed period of time to the seller (the "protection seller") (like paying insurance premiums).
15. In early 2007, Paulson identified various RMBS it expected to experience credit
events and asked Goldman to help it find counterparties that would sell it credit protection on the
RMBS, through the use of CDSs. Unable to find counterparties for the CDS trades, Goldman
facilitated Paulson's desire to short the selected RMBS by creating a synthetic collateralized debt
obligation ("CDO"), called ABACUS 2007-AC1 ("Abacus"), which held a portfolio of CDSs
that were tied to the performance of a group of RMBS (known as the "reference entity"), which
Paulson had hand-selected to fail.
16. Because the nature of a synthetic CDO required a counterparty to take the "long"
side of the CDSs, Goldman, acting as intermediary and underwriter of Abacus, needed to find
investors to offset Paulson's short position. Goldman knew that it would be difficult, if not
impossible, to find investors willing to take a long position in Abacus if it disclosed that Paulson,
a short investor, played a significant role in selecting the portfolio of referenced securities (in
other words, that the deck was stacked against them), By contrast, Goldman knew that telling
investors that an experienced and independent third-party collateral manager selected the
securities would allay fears among long investors about the riskiness of the performance of those
securities and would better facilitate the transaction.
17. Thus, the Abacus marketing materials Goldman distributed to potential investors
that described the reference entity of RMBS, stated that those RMBS had been evaluated and
selected by a third-party with experionce analyzing credit risk in RMBS, ACA Management LLC
("ACA"). Goldman did not disclose Paulson's adverse economic interest (as the protection
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buyer) or its role in the portfolio selection process in the term sheet, flip book, offering
memorandum or other marketing materials provided to investors.
18. The Abacus transaction closed on April 26, 2007. Goldman received
approximately $15 million for structuring and marketing Abacus. According to the SEC, within
months, by October 2007, over 80% of the RMBS in the Abacus reference portfolio had been
downgraded. This increased to 99% by January 2008. As a result, long investors in the Abacus
CDO lost over $1 billion. Paulson's opposing short position yielded a profit of approximately $1
19. According to The Wall Street Journal, Abacus was "one of the worst-performing
mortgage deals of the housing crisis, based on one measure of rating-fnn downgrades. Less
than a year after the deal was completed, 100% of the bonds selected for Abacus had been
downgraded, according to a February 2008 report by Wachovia Capital Markets .... That was a
fate only two other such [CDOs] suffered around that tune, out of hundreds in the Wachovia
report." Abacus Deal: As Bad as They Come, The Wall Street Journal (Apr. 20, 2010).
20. On August 29, 2008, unbeknownst to Goldman's investors, the SEC began a
formal investigation into the Abacus deal. During its investigation, the SEC deposed five
Goldman Sachs employees who participated in ,structuring the Abacus offering and reviewed
approximately 8,000,000 pages of documents produced by Goldinan.
21. Goldman's SEC filings signed by the Individual Defendants after it was notified
of the SEC's Abacus investigation contained a discussion of "Legal Proceedings" against
Goldman and vaguely referenced unrelated government investigations and subpoenas, but did
not mention the SEC's Abacus investigation or the specific conduct that the SEC was
investigating — Goldman's alleged deception of investors concerning Paulson's role in selecting
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the RMBS in the reference entity tied to the synthetic CDO. Goldman also did not disclose the
SEC's Abacus investigation in any of its public statements, conference calls or press releases.
22. In July 2009, unbeknownst to Goldman's investors, the SEC Staff (the "Staff')
sent Goldman a Wells Notice notifying it that the Staff intended to recommend that the SEC
bring a civil enforcement action against Goldman for its role in Abacus. On September 10,
2009, Goldman responded to the Wells Notice with a Wells Submission addressing the Staff's
allegations, defending the Company, and recommending that the SEC not approve the Staff's
request to file a formal civil action. Goldman filed a supplemental Wells Submission on
September 25, 2009. These documents did not become public until April 2010.
23. Goldman described the crux of the Staff's allegations in its initial Wells
Submission, which was not then made available to the public;
Goldman Sachs understands that the Staff currently proposes to recommend that
the Co=ission bring an enforcement action against Goldman Sachs alleging
violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Staff contends
a Goldman Sachs deceived ACA by leading ACA to believe that
Paulson would invest in the equity tranche of 2007-AC1, thereby allegedly
causing ACA to believe that Paulson had the same interests as ACA when
Paulson's interests were, according to the Staff, the opposite of ACA's
Goldman Sachs deceived investors in the 2007-AC1 transaction by
describing ACA as the Portfolio Selection Agent when, in fact, Paulson
had played a significant role in selecting the Reference Portfolio.
To Goldman Sachs' understanding, the Staff's theory is that Goldman Sachs
should have made the role of Paulson in the 2007-AC1 transaction cicar to ACA,
and disclosed that role (and Paulson's identity) in the offering documents. If the
Commission chooses to proceed against Goldman Sachs, the Staff has indicated it
will seek disgorgement of Goldinan Sachs's profits on the 2007-AC1 transaction,
as well as penalties and injunctive relief.
September 10, 2009, Wells Submission at 17.
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24, Goldman's SEC filings signed by the Individual Defendants after its receipt of the
Wells Notice and filing of its Wells Submissions contained a discussion of "Legal Proceedings"
against Goldman and vaguely referenced unrelated government investigations and subpoenas,
but did not mention the Wells Notice or the Wells Submissions or the specific conduct that
formed the basis for the Wells Notice (described in Goldman's Wells Submission and quoted
immediately above). Goldman also did not disclose the Wells Notice or Wells Submissions, or
their contents, in any of its public statements, conference calls or press releases.
25. On the contrary, Goldman emphasized its hard-earned reputation as an investment
bank that consistently put the needs of its clients above all else. Goldman represented that this
reputation was paramount to the Firm's success and ability to maintain its market share.
Particularly given the prominence of Goldman's discussion of the importance of its reputation,
the nature of its conduct in Abacus and the SEC's investigation and potential civil charges
stemming therefrom posed significant reputational risk — that future clients and trade partners
would refuse to work with Goldman because they feared being lied to and manipulated like ACA
and Abacus investors were; regulatory risk — that government regulation in response to
Goldman's misconduct could result in a constriction of Goldman's business including in
financial security instruments; and litigation risk — that an SEC civil action and other actions
taken by various regulators, agencies and private civil litigants could commence and that
Goldinan could be forced to pay penalties and defense costs.
26. On April 16, 2010, the SEC filed a civil complaint against Goldman that detailed
the Finn's conduct in Abacus and the subject of the SEC Staff's investigation. Upon learning of
this news, the market reacted in an extremely negative manner. Goldman's common stock
declined over 20 points, or nearly 13 % on extremely heavy volume. The stock continued to fall
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in the following days as more details about Abacus were released to the market. Other
regulatory agencies, both domestic and foreign, vowed to investigate Goldman's conduct and
potentially commence enforcement actions and litigation of their own.
V. FALSE AND MISLEADING STATEMENTS
27. Throughout the Class Period, Goldman and the Individual Defendants
misrepresented and failed to disclose the fact that the SEC was investigating Goldman's actions
in the structuring, sale and trading of mortgage derivative products. Goldman and the Individual
Defendants also misrepresented material facts concerning Goldman's role in the derivative
market while at the same time admitting that loss of reputational capital, regulatory
investigations and legal or regulatory restrictions on its businesses posed significant risks. Now
that the SEC has sued Goldman for fraud and charged it with misleading its own clients, the Finn
is in a crass-fire of litigation, regulatory investigations, legislative and regulatory actions —
realizing the very risks posed by the acts defendants had previously hidden.
28. On July 14, 2009, Goldman reported its earnings for its fiscal second quarter
ended June 26, 2009. Neither the press release nor the 8-K filing that included the press release
(signed by defendant Viniar) referenced the Wells Notice or Abacus.
29. On July 14, 2009, Goldman conducted a second quarter 2009 Earnings Call.
Neither the Wells Notice nor Abacus was mentioned. On the contrary, defendant Viniar
provided an overview of second quarter results that included an emphasis on Goldman's
dedication to clients and to strengthening the Film's reputation. He stated: "The competitive
environment in the second quarter remained fragmented and levels of available risk capital
remained low. Our ability to stay focused on seri ,ing our clients yielded strong results
particularly within our multifaceted FICC [fixed income, currency, and commodities] business."
(Emphasis added). He continued:
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For the past two years, we've operated in an extremely challenging environment.
Our performance in this cycle has been guided by several principles, including
putting our clients' needs first, executing our stated strategy and acting as a good
steward of the f rrn. We adhere to these philosophies to enhance and presen;e our
franchise and protect the interests of our shareholders. These are long standing
principles and we remain committed to them.
Furthermore, their value is amplified in a difficult environment. Thus, we will
continue to focus on maintaining our leading global franchise, serving the world's
most important corporations, financial institutions, governments and high net
worth individuals. In the current environment, our clients' demand for effective
advice and execution is elevated. To meet these demands, we will continue to
provide a broad set of solutions on an integrated basis, seeking to serve as a
trusted advisor, financier, asset manager, co-investor and market maker.
30. Defendant Viniar's July 14, 2009 statements were materially false and misleading
because they (a) stressed Goldman's focus on client needs but failed to disclose the material fact
that Goldman was under investigation by the SEC for acts that were fraudulent and contrary to
the interest of its clients, and (b) failed to disclose that the Abacus transaction and the SEC
investigation had caused the risks related to reputational damage, government investigation or
litigation and additional restrictions on its business through legislation or regulation to be
31. On August 5, 2009, Goldman filed its second quarter report on Form 10-Q with
the SEC (signed by defendant Viniar). This was the first Foil T O-Q quarterly report filed by
Goldman after it received the SEC's Wells Notice regarding Abacus in July 2009, The Form
10-Q contained a discussion of "Legal Proceedings" that was intended to "supplement" and
"amend" its January 27, 2009 Form l O-K and first quarter 2009 Form 1 O-Q. However, the
second quarter 2009 Form 10-Q made no mention of the SEC investigation into Abacus or the
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32. Although Goldman's annual report for fiscal 2008 on Form 10-K, fled with the
SEC on January 27, 2009 ("2008 10-K") and signed by the Individual Defendants, was published
several months after the initiation of the SEC's Abacus investigation and contained a lengthy
discussion of "Legal Proceedings," it did not mention Abacus or the SEC's Abacus investigation.
The 2008 10-K did list "Mortgage-Related Matters" and stated that:
GS&Co. and certain of its affiliates, together with other financial services firms,
have received requests for information from various governmental agencies and
self-regulatory organizations relating to subprime mortgages, and securitizations,
collateralized debt obligations and synthetic products related to subprime
mortgages. GS&Co. and its affiliates are cooperating with the requests.
2008 10-K at 49. However, this disclosure could not have served as notice to investors about the
SEC's Abacus investigation because it was identical to the one included in Goldman's Form 10-
K for fiscal 2007, filed January on 29, 2008, months prior to the initiation of the SEC's Abacus
33. Defendants' August 5, 2009 Form 10-Q was materially false and misleading
because it (a) Failed to disclose the material fact that Goldman was under investigation by the
SEC for acts that were fiaudulent and contrary to the interest of its clients, and (b) failed to
disclose that the Abacus transaction and the SEC investigation had caused the risks related to
reputational damage, government 'investigation or litigation and additional restrictions on its
business through legislation or regulation to be realized.
34. On October 15, 2009, Goldman reported its earnings for its fiscal third quarter
ended September 25, 2009. Neither the press release nor the Form 8-K filing that included the
press release (signed by defendant Viniar) referenced the Wells Notice or Abacus. However, the
press release did quote defendant Blankfein, who stated:
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Although the world continues to face serious economic challenges, we are seeing
improving conditions and evidence of stabilization, even growth, across a number
of sectors. Our client franchise business — advisory, financing, market making and
asset management — contribute to and benefit from the overall improvement in
conditions. Because the job market, and growth more generally, remain under
stress, we continue to be focused on actively helping our clients in order to
promote greater economic activity.
35. On October 15, 2009, Goldman conducted a third quarter 2009 Earnings Call.
Neither the Wells Notice nor Abacus were mentioned. In the call, defendant Viniar provided an
overview of third quarter results that included an emphasis on Goldman's dedication to its clients
and to strengthening the Firm's reputation. He stated:
Our results in the third quarter reflect the continued demand for expert advice and
execution for our global client base. Throughout this financial crisis, we've
maintained an unwavering focus on serving our clients. We believe that staying
close to our clients during periods of market turmoil reinforces the strength of our
franchise. Our client relationships have been critical to our recent [good]
performance and will remain a key driver of our future performance.
The last 18 months have been an extremely challenging period for the global
financial services industry. There are many lessons to be taken from all that has
transpired. During the most turbulent of times we stayed focused on several
critical objectives: support the efficient functioning of capital markets which is
critical to global economies, financially prepare the firm for a more difficult
operating environment, provide unwavering service to our clients and protect our
franchise and thus shareholder value.
To accomplish these objectives, we made prices when markets were volatile and
illiquid and extended credit when credit was scarce. We incurred the economic
costs associated with proactively reducing our exposure to leverage loans in real
estate by nearly 60% and raising $11 billion in capital. And these were steps we
took before we received TARP funds from the U.S. goverment. In just over a
year, we nearly doubled our liquidity balances to over $170 billion.
We didn't have any unique insights about how difficult things would become. We
took these actions out of prudence and awareness that we didn't have all the
answers. We took these actions because we knew that we had an important role to
play in supporting global capital markets and economies, our clients, Our more
than 30, 000 employees and roost importantly our shareholders.
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By staying focused on these objectives, we've gained several secondary benefits.
First and foremost, the most attractive aspects of our culture, collaboration,
nimbleness -anal commitment to excellence, have been strengthened. These cultural
attributes remain critical to our ability to navigate the current environment.
36. Defendants' October 15, 2009 statements were materially false and misleading
because they (a) discussed Goldman's focus on client needs but failed to disclose the material
fact that Goldman was under investigation by the SEC for acts that were fraudulent and contrary
to the interest of its clients, and (b) failed to disclose that the Abacus transaction and the SEC
investigation had caused the risks related to reputational damage, government investigation or
litigation and additional restrictions on its business through legislation or regulation to be
37. On November 4, 2009, Goldinan filed its third quarter Form 10-Q with the SEC
(signed by defendant Viniar). This was the first quarterly report filed by Goldman that covered
the period in which it received the SEC's Wells Notice regarding Abacus. The third quarter 10-Q
contained a discussion of "Legal Proceedings" that was intended to "supplement" and
"amend" its 2008 10-K and first and second quarter 2009 10-Qs, but was identical to those
prior disclosures. The third quarter 2009 10-Q . made no mention of the SEC investigation into
Abacus or the Wells Notice.
38. Defendants' November 4, 2009 ForFn 10-Q was materially false and misleading
because it (a) failed to disclose the material fact that Goldman was under investigation by the
SEC for acts that were fraudulent and contrary to the interest of its clients, and (b) failed to
disclose that the Abacus transaction and the SEC investigation had caused the risks related to
reputational damage, governnnent investigation or litigation and additional restrictions on its
business through legislation or regulation to be realized.
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39. On November 10, 2009, defendant Blankfein discussed Goldman's positive
performance at the annual Bank of America Merrill Lynch Banking and Financial Services
Conference, Defendant Blankfein focused on the importance of Goldman's relationship with its
clients in maintaining the Firm's reputation and the health of its business. Notably, neither
Abacus nor the Wells Notice were mentioned:
Our job, our duty to shareholders is to protect and grow this client franchise that is
the lifeblood of Goldman Sachs. And the best way we know how to do that is to
safeguard our culture of performance and risk management ....
Our client franchise is the core of our business model and strategy.
Our deep client relationships in investment banking provide us with [our
financial] opportunities ....
The fact is that for Goldman Sachs, the vast majority of risk we take and revenues
we generate is dominated by trades that advance a client need or objective.
During our history, our firm has been guided by three tenets. The needs and
objectives of our clients; attracting talented and long-term oriented people, and
our reputation and client franchise. We remain every bit as focused on these
ambitions. .... We no doubt will encounter our fair share of challenges and
missteps, and we already have. But the legacy of our client service and
performance for our shareholders, which every person at Goldman Sachs is
charged with protecting and advancing, must be continually nurtured and passed
on to fixture generations. And T have never been more confident of that outcome.
40. Defendant Blankfein's November 10, 2009 statements were materially false and
misleading because they (a) discussed Goldman's focus on client needs but failed to disclose the
material fact that Goldman was under investigation by the SEC for acts that were fraudulent and
contrary to the interest of its clients, and (b) failed to disclose that the Abacus transaction and the
SEC investigation had caused the risks related to reputational damage, government investigation
or litigation and additional restrictions on its business through legislation or regulation to be
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41. On December 24, 2009, The New York Times published an article detailing
Goldman's participation in similar synthetic CDO deals, also called Abacus, where Goldman
created synthetic CDOs to sell to investors at the same time it was betting against, or shorting,
those transactions. According to the article:
Goldman and other firms eventually used the CDO's to place unusually large
negative bets that were not mainly for hedging purposes, and investors and
industry experts say that put the firms at odds with their oven clients' interests,
"The simultaneous selling of securities to customers and shorting them because
they believed they were going to default is the inost cynical use of credit
inforrnatio^n that I have ever seen," said Sylvain R. Raynes, an expert in structured
finance at R&R Consulting in New York. "When you buy protection against an
event that you have a hand in causing, you are buying fire insurance on someone
else's house and then committing arson."
Banks Bundled Bad Debt, Bet Against It and Won, The New York Times (Dec. 24, 2010)
42. In response to The New York Times article, Goldman issued a press release
denying that it had done anything wrong by in connection with structuring and trading the
synthetic CDOs discussed in the article:
Any discussion of Goldman Sachs' association with this product [synthetic
CDOs] must begin with our overall activities in the mortgage market. Goldman
Sachs, like other financial institutions, suffered significant losses in its residential
mortgage portfolio due to the deterioration of the housing market (we disclosed
$1.7 billion in residential mortgage exposure write-downs in 2008). These losses
would have been substantially higher had we not hedged. We consider hedging
the cornerstone of prudent risk management.
Synthetic CDOs were an established product for corporate credit risk as early as
2002. With the introduction of credit default swaps referencing mortgage products
in 2004-2005, it is not surprising that market participants would consider
synthetic CDOs in the context of mortgages. Although precise tallies of synthetic
CDO issuance are not readily available, many observers would agree the market
size was in the hundreds of billions of dollars.
Many of the synthetic CDOs arranged were the result of demand ftorn investing
clients seeking Iong exposure.
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Synthetic CDOs were popular with many investors prior to the financial crisis
because they gave investors the ability to work with banks to design tailored
securities which met their particular criteria, whether it be ratings, leverage or
other aspects of the transaction.
The buyers of synthetic mortgage CDOs were large, sophisticated investors.
These investors had significant in-house research staff to analyze portfolios and
structures and to suggest modifications. They did not rely upon the issuing banks
in making their investment decisions.
For static synthetic CDOs, reference portfolios were fully disclosed. Therefore,
potential buyers could simply decide not to participate if they did not like some or
all the securities referenced in a particular portfolio.
Synthetic CDOs require one party to be long the risk and the other to be short so
without the short position, a transaction could not take place.
It is fully disclosed and well known to investors that banks that arranged synthetic
CDOs took the initial short position and that these positions could either have
been applied as hedges against other risk positions or covered via trades with
Most major banks had similar businesses in synthetic mortgage CDOs.
As housing price growth slowed and then turned negative, the disruption in the
mortgage market resulted in synthetic CDO losses for many investors and
financial institutions, including Goldman Sachs, effectively putting an end to this
43. Goldman's response was misleading because it suggested that Goldman's
synthetic CDO business was fully aligned with industry practices; investors on both sides of the
transactions were fully informed about the nature and structure of these deals; and the deals were
driven by investor demand for "long" positions. However, Goldman failed to disclose the facts
that it had structured the Abacus transaction adverse to the interests of its clients, that the SEC
had been investigating the Abacus deal for some time, and that Goldman had received a Wells
Notice that indicated that the SEC did not believe that any of the above were true as to at least
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one specific Abacus deal. These facts would have been material to investors who were trying to
evaluate the merits of The New York Times article's charges in light of Goldman's response,
44. In January 2010, Vanity Fair released an expos6 about the history of Goldman's
business and the people running it. The article addressed recent criticism of Goldman's practices
during the financial crisis, including its payment of huge compensation to employees while
accepting money through the government's Troubled Asset Relief Program ("TARP"), and its
strategy of shorting mortgage-backed securities while selling those same products to its clients.
When the article raised the prospect that a hedge fund could enlist Goldman's help in creating a
synthetic CDO that it was able to tie to the performance of assets it purposely selected to perform
poorly, without disclosing this to buyers on the long side — the exact circumstances of Abacus —
defendant Cohn denied that this was occurring and stated that the buyers on the long side knew
what they were getting themselves into:
In the aftermath of the crisis, criticism erupted that Goldman had continued to sell
mortgage-backed securities to its clients while betting against those very
securities for its own account.
Goldman argues that the buyers of their C.D.O's were themselves sophisticated
investors who were capable of making their own decisions. In other words, they
were counterparties. "You don't shut your franchise down just because you have
a view of the market," says [COO Gary] Cohn. "When we do an I.P.O., people
don't ask us our view of the stock market." But a less generous interpretation was
given in a recent McClatchy Newspapers series, which quotes an analyst report
that describes Goldman as being "solely interesting in pushing its dirty inventory
onto unsuspecting and obviously gullible investors." (A Goldman spokesperson
says, "The statement is not true. The McClatchy series was characterized by
unsubstantiated claims, innuendo, and outright falsehoods," McClatchy,
however, stands by its work.) And so, if the old Goldman was defined by its
refusal to do hostile takeovers, the new Goldman is defined by its skill at
protecting its own interests.
With the benefit of hindsight, there is another aspect of the story that may
ultimately prove to be more troubling, and Goldman has disclosed that it, along
with other financial institutions, has received requests for information from
"various governmental agencies" relating to "subprime mortgages, and
Case 1: 1 0-cv-03595-UA Document 1 Filed 04/30/2010 Page 19 of 43
securitizations, collateralized debt obligations and synthetic products related to
One new invention the Street created was something called a synthetic C.D.O.,
which was sort of like making a coin: you have to have two sides, heads and tails,
long and short. In effect, the person who has tails, or is short, makes small
payments to the person with heads as long as the securities that make up the
C.D.O. are performing. If they blow up, then a big payment goes the other way.
Investors in a C.D.O. can choose to buy a range of securities, from what are
supposedly the safest all the way down to the riskiest, or equity, position. The
person who owns the equity stands to make the most for taking the greatest risk,
but only after everyone else gets paid. So if you owned the less risky slices, you
might feel good if the equity owner were a smart guy who only stood to get paid
after you did.
Except that might not be the way it worked, because the equity owner could also
be the person who had the tails, or short, position. As several sources have
described it to me, the numbers could work so that the equity investor would do
decently if the security performed—but make a fortune if it went bad.
The equity owner could also play a role in selecting the mortgages on which that
C.D.O. was based. So theoretically at least—and some suspect this is not just
theoretical—the equity owner could choose securities that he thought had a good
chance of going to hell. As one person says, this is akin to "betting that your own
house is going to burn down" after you build it with highly flammable materials.
There are many permutations of this trade. Some people believe that Goldman
engaged inversions of it, and that it facilitated them far Hedge funds. Gold7nan
defends this. "We own equity, we buy a credit- default swap, and we are hedging
ourselves, " says Cohn. As for selecting the collateral, lie says, "It's no different.
Our clients are smart, sophisticated institutions. They should know that's the
He has a point. As long as no one explicitly misrepresented where their interests
lay and there is no evidence of that-supposedly sophisticated investors have a
duty to understand what th.ey're buying, not to base their decision on what the
"sinart guy" is doing.
And if the mortgage market hadn't collapsed—and there's no way anyone could
have known for sure that it would----then these deals wouldn't have been so
profitable, and no one would care. But when I ask one knowledgeable person
about what happened to some of the deals that Goldman is rumored to have done,
he responds with one word: "Torched." Or as another person says about the
bigger picture of the crisis, "Goldman's management team was almost flawless in
Case 1: 1 0-cv-03595-UA Document 1 Filed 04/30/2010 Page 20 of 43
its execution. But how many people needed govermnent help because of the
things Goldman sold them?"
The Bank Job, Vanity Fair (Jan. 2010) (emphasis added).
45. Defendant Cohn's discussion of synthetic CDOs was misleading because it
suggested that Goldman's synthetic CDO business was fully aligned with industry practices;
investors on both sides of the transactions were fully informed about the nature and structure of
these deals — when they were not; and the deals were driven by investor demand for "long"
positions — when they were not. In fact, Goldman failed to disclose the fact that the SEC had
been investigating the Abacus deal for some time and that Goldman had received a Wells Notice
that indicated that the SEC did not believe that any of the above were true as to at least one
specific Abacus deal. This fact would have been material to investors who were trying to
evaluate the merits of the charges contained in the Vanity Fair article.
46. On January 21, 2010, Goldman reported its earnings for its fiscal fourth quarter
and fiscal year ended December 31, 2009. Neither the press release nor the Form 8-K filing that
included the press. release (signed by defendant Viniar) referenced the Wells Notice or Abacus.
However, the press release did quote defendant Blankfein, who stated:
Throughout the year, particularly during the most difficult conditions, Goldman
Sachs was an active adviser, market maker and asset manager for our clients. Our
strong client franchise across global capital markets, along witli the commitment
and dedication of our people drove our strong performance. That performance, as
well as recognition of the broader environment, resulted in our lowest ever
compensation to net revenues ratio. Despite significant economic headwinds, we
are seeing signs of growth and remain focused on supporting that gro-,vth by
helping companies raise capital and manage their risks, by providing liquidity to
markets and by investing for our clients.
47. On January 21, 2010, Goldman conducted a fourth quarter 2009 Earnings Call.
Neither the Wells Notice nor Abacus were mentioned. In the call, defendant Viniar provided an
Case 1: 1 0-cv-03595-UA Document 1 Filed 04/30/2010 Page 21 of 43
overview of third quarter results that included an emphasis on Goldman's dedication to its
clients, to strengthening the Firm's reputation and to working with government agencies to
reform the financial system. He stated:
As in 2008, a diversified business model, global client franchise and our people's
unwavering commitment to client service position the firm to generate profitable
annual results. Given the tumultuous market environment, 2009 was a year in
which our clients placed extraordinary value on sound advice and timely
execution. Our ability to stay externally focused provided liquidity and capital to
clients when resources were scarce. Our vigilant focus on clients helped
differentiate the firm in the marketplace and positively impacted our performance.
The events of the last two years have understandably caused many of us to reflect
on the previous set of assumptions and expectations surrounding the financial
services industry. As a consequence, there have been significant changes within
our firm and the industry at large. Whether it is greater focus on leverage and
liquidity risks or the importance of robust system regulation, we have already
seen significant strides taken by many regulators and industry participants. We
believe that financial institutions have a significant and critical role to play in
promoting economic growth, jobs and wealth creation for society. We remain
committed to supporting initiatives that improve the long-term stability of the
global financial system. Thus we will continue to work with governments,
regulators and competitors across the world to strengthen standards and
Many of our core beliefs were also confirmed over the past two years, principally
the importance of our client franchise, employees, reputation and our long-terra.
focus on creating shareholder value. These tenets are encapsulated in the firm's
first three business principles, and they remain as relevant today as they did IA rhen
they were written over three decades ago. In addition, our commitment to fair
value accounting was validated and continues to be our life blood as it helps
establish a clear view of risk. Our core beliefs are integral to our broader
corporate strategy which will continue to be driven by our obligation to meet the
needs of our diverse client base. Our clients want integrated solutions, superior
execution and global capabilities. As a result, we will continue to offer integrated
advice, financing, and co-investing along with. best-in-class risk7nanagenient.
48. Defendants' January 21, 2010 statements were materially false and misleading
because they (a) discussed Golchnan's focus on client needs but failed to disclose the material
fact that Goldman was under investigation by the SEC for acts that were fraudulent and contrary
Case 1: 1 0-cv-03595-UA Document 1 Filed 04/30/2010 Page 22 of 43
to the interest of its clients, and (b) failed to disclose that the Abacus transaction and the SEC
investigation had caused the risks related to reputational damage, government investigation or
litigation and additional restrictions on its business through legislation or regulation to be
49. On March 1, 2010, Goldman filed its annual report for fiscal 2009 on Form 10-K
with the SEC (the "2009 10-K') (signed by the Individual Defendants). The 2009 10-K
described Goldman's debt underwriting business, where it "underwrite[s] and originate[s]
structured securities, which include mortgage-related securities and collateralized debt
obligations" and "structure[s] and execute[s] transactions that address complex client needs."
2009 10-K at 6-7.
50. In its section on "Risk Factors," Goldman warned that its role as a market-maker
and 'intermediary in complex financial transactions could put the Firm in a position of conflict
with its clients and if that happened it would damage the Firm's reputation, one of its most
Conflicts of interest are increasing and a failure to appropriately identify and
deal with conflicts of interest could adversely affect our businesses.
As we have expanded the scope of our businesses and our client base, we
increasingly must address potential conflicts of interest, including situations
where our services to a particular client or our O)4171 investments or other interests
conflict, or are perceived to conflict, with the interests of another client, as well as
situations where one or more of our businesses have access to material non-public
information that may not be shared with other businesses within the film and
situations where we may be a creditor of an entity with which we also have an
advisory or other relationship, In addition, our status as a bank holding company
subjects us to heightened regulation and increased regulatory scrutiny by the
Federal Reserve Board with respect to transactions between GS Bank USA and
entities that are or could be seen as affiliates of ours,
We have extensive procedures and controls that are designed to identify and
address conflicts of interest, including those designed to prevent the improper
sharing of information among our businesses. However, appropriately identifying
Case 1: 1 0-cv-03595-UA Document 1 Filed 04/30/2010 Page 23 of 43
and dealing with conflicts of interest is complex and difficult, and our reputation,
which is one of our most important assets, could be damaged and the willinzness
of clients to enter into transactions in which such a conflict might arise may be
affected if we fail, or appear to fail, to identify and deal appropriately with
conflicts of interest. In addition, potential or perceived conflicts could give rise to
litigation or regulatory enforcement actions.
2009 10-K at 36 (emphasis added).
51. Further, the "Risk Factors" section of the 2009 10-K stated that conflicts of
interest could lead to regulatory scrutiny, additional regulation and negative publicity that could
harm the Company's reputations and business:
Our businesses and those of our clients are subject to extensive and pervasive
regulation around the world.
As a participant in the financial services industry and a bank holding company,
we are subject to extensive regulation in jurisdictions around the world. We face
the risk of significant intervention by regulatory and taxing authorities in all
jurisdictions in which we conduct our businesses. Among other things, as a result
of regulators enforcing existing laws and regulations, we could be fined,
prohibited f om engaging in some of our business activities, subject to limitations
or conditions on our business activities or subjected to new or substantially higher
taxes or other governmental charges in connection with the conduct of our
business or with respect to our employees. In addition, recent market disruptions
have led to numerous proposals in the United States and internationally for
changes in the regulation and taxation of the financial services industry, including
increased capital or new liquidity or leverage requirements for banks.
There is also the risk that new laws or regulations or changes in enforcement of
existing laws or regulations applicable to our businesses or those of our clients,
including tax burdens and compensation restrictions, could be imposed on a
limited subset of financial institutions (either based on size, activities, geography
or other criteria), which may adversely affect our ability to compete effectively
with other institutions that are not affected in the same way.
The impact of such developments could impact our profitability in the affected
jurisdictions, or even make it uneconomic for us to continue to conduct all or
certain of our businesses in such jurisdictions, or could cause us to incur
significant costs associated with changing our business practices, restructuring our
businesses, moving all or certain of our businesses and our employees to other
locations or complying with applicable capital requirements, including liquidating
assets or raising capital in a manner that adversely increases our funding costs or
otherwise adversely affects our shareholders and creditors.
Case 1: 1 0-cv-03595-UA Document 1 Filed 04/30/2010 Page 24 of 43
We may be adversely affected by increased governmental and regulatory
scrutiny or negative publicity.
Governmental scrutiny-from regulators, legislative bodies and law enforcement
agencies with respect to matters relating to compensation, our business practices,
our past actions and other matters has increased dramatically in the past several
years. The financial crisis and the current political and public sentiment regarding
financial institutions has resulted in a significant amount of adverse press
coverage, as well as adverse statements or charges by regulators or elected
officials. Press coverage and other public statements that assert some form of
wrongdoing, regardless of.the factual basis for the assertions being made, often
results in some type of investigation by regulators, legislators and law
enforcement officials or in lawsuits. Responding to these investigations and
lawsuits, regardless of the ultimate outcome of the proceeding, is time consuming
and expensive and can divert the time and effort of our senior management from
our business. Penalties and fines sought by regulatory authorities have increased
substantially over the last several years, and certain regulators have been more
likely in recent years to commence enforcement actions or to advance or support
legislation targeted at the financial services industry. Adverse publicity,
governmental scrutiny and legal and enforcement proceedings can also have a
negative impact on our reputation and on the morale and performance of our
employees, which could adversely affect our businesses and results of operations.
2009 10-K at 34-35 (emphasis added).
52. This extensive discussion of "Risks" failed to disclose that some of these risks,
especially conflicts of interest connected to Abacus and damage to Goldman's reputation, were
no longer mere potentialities, but had already taken place and began to materialize, in the form
of the SEC's investigation into Abacus and subsequent filing of a Wells Notice. These facts
were not discussed anywhere in the 2009 10-K, even in the lengthy discussion of "Legal
Proceedings" and "Mortgage-Related Matters," which merely included the same discussion of
govenument investigations included in the 2007 and 2008 10-Ks,
VI. THE TRUTH IS REVEALED
53. On April 16, 2010, at approximately 10:36 a.m. ET, the SEC announced that it
had filed securities fraud charges against Goldman and its employee, Fabrice Tourre, for snaking
material misstatements and omissions in connection with a synthetic CDC that Goldman
Case 1: 1 0-cv-03595-UA Document 1 Filed 04/30/2010 Page 25 of 43
structured and marketed to investors, Prior to the SEC announcement Goldman shares were
trading at $184.27 (as of April 15, 2010).
54, Immediately after the announcement, Goldman's common stock began
plummeting. By 10:40 a.m., it had dropped more than ten dollars per. share. By the close of
trading, the stack price had fallen nearly 13% from the previous day's closing price, from
$184,27 to $160.70 on extremely high volume (nearly 10 times the average volume over the
55. The SEC complaint against Goldman revealed that the Firm had misrepresented
and failed to disclose that it was under investigation by the SEC for violations of the securities
laws in connection with the Abacus transaction described above. Moreover, the SEC complaint
set forth the nature of the Abacus transaction, and laid bare the conflicted position that Goldman
was in. The release of this information caused damage to Goldman's reputation, resulted in the
loss of at least two customers, and gravely increased the prospect of additional restrictions on
Goldman's business through legislation or regulation.
56. The SEC complaint against Goldman was major news that affected the entire
market and became the subject of widespread media coverage for weeks to come:
As Wall Street bombshells go, the lawsuit that the Securities and Exchange
Commission filed against Goldman Sachs Group Inc. is about as big as it gets,
Who knew the folks at the SEC still had it in them to accuse a major Wall Street
bank of fraud? And who could have guessed that Goldman's canned explanation
for its behavior during the subpr me mortgage bubble -- that it simply was serving
clients' needs -- could come so unglued so quickly?
To recap, the SEC's complaint accuses Goldman and one of its vice presidents of
selling subprime mortgage-backed securities to institutional investors, without
disclosing that one of its clients, the giant hedge fund Paulson & Co., had paid
Goldman to structure these securities so that they would be the world's perfect
shoe -- at least from Paulson's point of view.
Case 1: 1 0-cv-03595-UA Document 1 Filed 04/30/2010 Page 26 of 43
The securities, called Abacus 2007-AC1, became worthless within months,
showing that Paulson had done its homework. The SEC said Paulson paid
Goldman a $15 million fee.
The SEC said Goldman's main infraction was telling investors who bought the
securities that an independent company called ACA Management had chosen the
assets that were backing them, when it was Paulson that played a major role in the
process. The SEC said Goldman duped ACA into believing that Paulson was
looking to take a bullish position, though the SEC's complaint doesn't try to
explain why this somehow would excuse ACA's decision to bow to Paulson's
Neither the fund, founded by John Paulson, nor its employees were named as
defendants, because the SEC said it was Goldman that made the misstatements to
The assets backing these securities, known as synthetic collateralized debt
obligations, were themselves securities backed by subprime mortgages. Goldman
issued a one-sentence statement denying the SEC's allegations as "completely
unfounded in law and fact." Among the investors that the SEC says got suckered
was a hapless Goldman client in Dusseldorf, Germany, called IKB Deutsche
It's hard to imagine an allegation by the government that could be more
damaging to Goldman's reputation. This wasn't the American public at large that
Goldman supposedly ripped off, which might be forgivable or even praiseworthy
from the view of Goldman's shareholders. These were Goldman clients that
Goldman allegedly ripped off, in an effort to please another Goldman client.
Throughout the aftermath of the financial crisis, Goldman and its chief executive
officer, Lloyd Blankfein, have consistently stuck to the same story when asked
why the bank had created and sold to its clients subprime mortgage-backed
securities that quickly became worthless: The fiiin was merely giving those
clients what they wanted.
What They Do
That's what market makers do, Blankfein told the Financial Crisis Inquiry
Corm-mission last January. "What we did in that business was underwrite to, again,
the most sophisticated investors who sought that exposure," he testified.
That may have been true when it came to the Goldman client Paulson & Co.,
which made $1 billion shorting these allegedly custom-made CDOs by buying
credit-default swaps on them, If we are to believe the SEC's claims, though, it
Case 1: 1 0-cv-03595-UA Document 1 Filed 04/30/2010 Page 27 of 43
wasn't true for the Goldman clients that lost $1 billion on the CDOs, including the
chumps at IKB, which lost $150 million.
While those clients may have been seeking exposure to subprime mortgages, and
may even have been unconscionably stupid for doing so, they surely weren't
seeking exposure . to the other ,side of a cherry-picked trade created for the
exclusive benefit of one of the world's largest hedge funds. They probably aren't
happy, either, with Moody's or Standard & Poor's, which, you guessed it, slapped
AAA ratings on the CDOs' highest rungs.
Clear in Translation
Their eyes must have been burning, too-, when they saw some of the e-mails that
the SEC quoted in its suit, portions of which the SEC translated from French.
(The spellings and punctuation are as they appear in the SEC's complaint.)
"More and more leverage in the system. The whole building is about to collapse
anytime now," Fabrice Tourre, the Goldman Sachs vice president who was sued
for his role in putting together the deal, wrote on Jan. 23, 2007.
"Only potential survivor, the fabulous Fab ... standing in the middle of all these
complex, highly leveraged, exotic trades he created without necessarily
understanding all of the implications of those monstruosities!! !"
A few weeks later, Tourre, now 31, e-mailed a top Goldman trader: "the cdo biz is
dead we don't have a lot of time left." Goldman closed the Abacus offering in
Those statements bring to mind a well-known quote from Warren Buffett, who
invested $5 billion in Goldman back in September 2008 near the peak of the
financial crisis: "It takes 20 years to build a reputation and five minutes to ruin it."
Can't wait to see how Goldman tries to talk its way out of this one.
Goldman Serves One Master Better Than. the Others, Bloomberg (Apr, 16, 2010)
57. One Wall Street analyst from Credit Suisse predicted that the SEC complaint
would likely lead to enhanced regulatory scrutiny of derivatives products that could have a
negative impact on Goldman's client base and bottom-line:
The civil lawsuit adds to the prospects of more onerous regulatory measures on
large financial institutions. In particular over-the-counter derivative legislation.
We not that derivative legislation is most likely to impact GS's [Goldman 'sl
Case 1: 1 0-cv-03595-UA Document 1 Filed 04/30/2010 Page 28 of 43
fixed-income, currencies and commodities (FICC) revenue, which accounted
for 38% of revenue, on average, from 2007 through 2009. Additionally, we
believe that there are legitimate concerns over the long-term impact on
Goldman's market share, as some clients may be deterred from doing the same
level of business with a firm that is perceived to be a regulatory target.
58. In response to the SEC complaint, the governments of Great Britain, Ger »any
and prance announced forthcoming investigations into Goldman's Abacus transaction, hinting at
the need for international regulatory changes and new limitations on investment banks' sale of
complex derivative products. British Prime Minister Gordon Brown, who accused Goldman of
"moral bankruptcy" for its role in Abacus, stated: "There are hundreds of millions of pounds that
have been traded here, and it looks as if people were misled about what happened." German
Chancellor Angela Merkel's office requested the SEC hand over the details of its lawsuit against
Goldman. German government spokesman Ulrich Wilhelm said: "After a careful evaluation of
the documents, we will decide about legal steps." One private bank in Germany, BayernLB, also
announced that it was no longer willing to conduct business with Goldman. As did Dutch
transport pension fund, Pensioenfonds Vervoer, which dropped Goldman as its fiduciary
manager. France's Economy Minister Christine Lagarde said that the accusations in the SEC's
complaint warranted a full probe by French regulators.
59. On April 24, 2010, the Senate Permanent Subcommittee on Investigations (the
"Subcommittee") announced that it would hold a hearing on April 27, 2010 to discuss the role
investment banks played in causing the recent global financial crisis, using Goldman as a "case
study." With the announcement, the Subcommittee released several internal Goldman e-mails
and revealed that defendants Blankfein and Viniar and several other former and current Goldman
employees would testify at the hearing. According to the Subcommittee's press release:
Case 1: 1 0-cv-03595-UA Document 1 Filed 04/30/2010 Page 29 of 43
The Senate Permanent Subcommittee on Investigations released several exhibits
that will be among those discussed on Tuesday at the fourth of its hearings on the
causes and consequences of the financial crisis.
Using Goldman Sachs as a case study, the April 27 hearing will focus on the role
of investment banks in contributing to the worst U.S. economic crisis since the
1930s, resulting in the foreclosure of millions of homes, the shuttering of
businesses, and the loss of millions of American jobs. The Subcommittee, whose
Chairman is Sen. Carl Levin, D-Mich., and whose Ranking Republican is Sen.
Tom Coburn, R-Okla., has conducted a nearly year and a half investigation into
the 2008 financial crisis.
"Investment banks such as Goldman Sachs were not simply market-makers, they
were self interested promoters of risky and complicated financial schemes that
helped trigger the crisis," said Sen. Levin. "They bundled toxic mortgages into
complex financial instruments, got the credit rating agencies to label them as
AAA securities, and sold them to investors, magnifying and spreading risk
throughout the financial system, and all too often betting against the instruments
they sold and prof Ling at the expense of their clients." The 2009 Goldman Sachs
annual report stated that the f nn "did not generate enormous net revenues by
betting against residential related products." Levin said, "These e-mails show that,
in fact, Goldman made a lot of money by betting against the mortgage market."
The four exhibits released today are Goldman Sachs internal e-mails that address
practices involving residential mortgage-backed securities and collateralized debt
obligations (CDOs), financial instruments that were key in the financial crisis.
Goldman Sachs Chairman and Chief Executive Officer Lloyd Blankfein and other
current and f6imer company personnel are scheduled to testify at Tuesday's
In one of the e-mails released today, Mr. Blankfein stated that the firm came out
ahead in the mortgage crisis by taking short positions. In an e-mail exchange with
other top Goldman Sachs executives, Mr, Blankfein wrote: "Of course we didn't
dodge the mortgage mess. We lost money, then made more than we lost because
In a second e-mail, Goldman Sachs Chief Financial Officer David Viniar, who
also will testify on Tuesday, responded to a report on the firm's trading activities,
showing that -- in one day -- the firm netted over $50 million by taking short
positions that increased in valued as the mortgage market cratered. Mr. Viniar
wrote: "Tells you what might be happening to people who don't have the big
short." Levin said: "There it is, in their own words: Goldman Sachs taking `the
big short' against the mortgage market."
Case 1: 1 0-cv-03595-UA Document 1 Filed 04/30/2010 Page 30 of 43
In a third e-mail, Goldman employees discussed the ups and downs of securities
that were underwritten and sold by Goldman and tied to mortgages issued by
Washington Mutual Bank's subprime lender, Long Beach Mortgage Company.
Reporting the "wipeout" of one Long Beach security and the "irnminent" collapse
of another as "bad news" that would cost the firm $2.5 million, a Goldman Sachs
employee then reported the "good news" — that the failure would bring the firm $5
million from a bet it had placed against the very securities it had assembled and
In a fourth e-mail,. a Goldman Sachs manager reacted to news that the credit
rating agencies had downgraded $32 billion in mortgage related securities —
causing losses for many investors — by noting that Goldman had bet against them:
"Sounds like we will make some serious money." His colleague responded:, "Yes
we are well positioned."
60. On April 26, 2010, Senator Levin released his opening statement for the
Subcommittee hearing. The statement summarized evidence reviewed by the Subcommittee
Staff that showed how Goldman profited at the expense of its clients and the general public while
its actions were contributing to the global housing and economic collapse. According to Senator
Levin's opening statement:
Goldman Sachs proclaims "a responsibility to our clients, our shareholders, our
employees and our communities to support and fund ideas and facilitate growth. "
Yet the evidence shows that Goldman repeatedly put its own interests and profits
ahead of the interests of its clients and our communities. Its misuse of exotic and
complex financial structures helped spread toxic mortgages throughout the
financial system. And when the system finally collapsed under the weight of those
toxic mortgages, Goldman profited from the collapse. The evidence also shows
that repeated public statements by the firm and its executives provide an
inaccurate portrayal of Goldman's actions during 2007, the critical year when the
housing bubble burst and the financial crisis took hold. The firm's own
documents show that while it was marketing risky mortgage-related securities, it
was placing large bets against the U.S. mortgage market. The fine has repeatedly
denied making those large bets, despite overwhelming evidence.
.... But Goldman Sachs didn't just make money, It profited by ta ping advantage
of its clients' reasonable expectation that it would not sell products that it didn't
want to succeed, and that there was no conflict of economic interest between the
firm and the customers it had pledged to seine. Goldman's actions demonstrate
that it often saw its clients not as valuable customers, but as objects for its own
Case 1: 1 0-cv-03595-UA Document 1 Filed 04/30/2010 Page 31 of 43
profit. This matters because instead of doing well when its clients did well,
Goldman Sachs did well when its clients lost money. Its conduct brings into
question the whole function of Wall Street, which traditionally has been seen as
an engine of growth, betting on America's successes and not its failures.
Goldman continues to deny that it shorted the mortgage market for profit, despite
the evidence. Why the denial? My best estimate is that it's because the firm
cannot successfully continue to portray itself as working on behalf of its clients if
it was selling mortgage related products to those clients while it was betting its
own money against those same products or the mortgage market as a whole. The
scope of this conflict is reflected in an internal company email sent on May 17,
2007, discussing the collapse of two mortgage-related instruments, tied to WaMu-
issued mortgages, that Goldman helped assemble and sell. The "bad news," a
Goldman employee says, is that the firm lost $2.5 million on the collapse. But the
"good news," he reports, is that the company had bet that the securities would
collapse, and made $5 million on that bet. They lost money on the mortgage
related products they still held, and of course the clients they sold these products
to lost big time. But Goldman Sachs also made out big time in its bet against its
own products and its own clients. Goldman CEO Lloyd Blankfein summed it up
this way: "Of course we didn't dodge the mortgage mess. We lost money, then
made more than we lost because of shorts." The conflict of interest that lies
behind that statement is striking.
Most investors make the assumption that people selling them securities want
those securities to succeed. That's how our markets ought to work, but they don't
always. .... Goldman documents make clear that in 2007 it was betting heavily
against the housing market while it was selling investments in that market to its
clients. It sold those clients high-risk mortgage-backed securities and CDOs that it
wanted to get off its books in transactions that created a conflict of interest
between Goldman's bottom line and its clients' interests.
61. On April 26, 2010, defendant Blankfein released his prepared statement ahead of
the Subcommittee's hearing. In his statement, Blankfein admitted that Goldman's reputation and
the trust of its clients was crucial to its survival:
As you know, ten days ago, the SEC announced a civil action against Goldman
Sachs in connection with a specific transaction. It was one of the worst days in my
professional life, as I know it was for every person at our firm. We believe deeply
in a culture that prizes teamwork, depends on honesty and rewards saying no as
much as saying yes. We have been a client-centeredfrrn for 140 years and if our
clients believe that we don't deserve their trust, we cannot survive.
Case 1: 1 0-cv-03595-UA Document 1 Filed 04/30/2010 Page 32 of 43
62. On April 27, 2010, the Subcommittee held its hearing. Goldman executives who
testified at the hearing, including Fabrice Tourre, the trader involved in Abacus that was named
as a defendant in the SEC's lawsuit, and defendants Blankfein and Viniar, were admonished by
the Senators for placing Goldin='s own interests ahead of those of its clients. The hearing
revealed that, according to Goldman internal e-mails, Goldman made a concerted effort in 2007
and 2008 to unload mortgage-based products that its own employees believed were "crappy" and
"shitty" onto "less-sophisticated" clients, while also taking a short position (or betting against)
those same securities. In 2007, while the value of these products plummeted, Goldman's net
profits from its short positions were approximately $500 million.
63. Senator Levin criticized Goldman for repeatedly violating its "first business
principle," stated prominently on Goldman's website, that "Our clients' interests always come
first. Our experience shows that if we serve our clients well, our own success will follow."
According to Senator Levin, "we've seen many instances today where that's not the case, where
you've put Goldman's interests above your clients'."
64. Specifically regarding Abacus, Tourre admitted that he "could have been more
accurate" in describing how the assets in the investment pool were selected. In addition, Craig
W. Broderick, Goldman's Chief Risk Officer, admitted to Senator Tom Cobw-n that Abacus
posed reputational risk to Goldman.
65. President Obama, who was already pushing for the passage of a financial reform
bill authored by Senator Christopher Dodd that would regulate derivatives trading, spoke to a
group that included Wall Street executives such as defendant Blankfein six days after the SEC
filed its complaint. Obama stated that:
Case 1: 1 0-cv-03595-UA Document 1 Filed 04/30/2010 Page 33 of 43
A free market was never meant to be a free license to take whatever you can get,
however you can get it. That is what happened too often in the years leading up to
the crisis. Some on Wall Street forgot that behind every dollar traded or
leveraged, there is a family looking to buy a house, pay for an education, open a
business or save for retirement. What happens here has real consequences across
66. U.S. Treasury Secretary Timothy Geithner suggested that that the SEC case
against Goldmnan may buttress arguments that Wall Street is in need of broad regulatory reform.
He stated: "In this financial crisis, you saw a range of just terrible things happen - catastrophic
failures in judgment by people running these institutions, catastrophic failures in basic
protections governments have to provide. The best thing we can do for the country is to make
sure we put in place strong protections. [I am] confident we're gonna see Americans come
together and pass reform."
67. Even Republicans who had been against the Dodd bill, such as Senator John
McCain, hinted that the Goldman case may make it tougher for Republicans to do nothing.
"When we find out that Goldman Sachs was betting against its own investors and, you know,
playing the double game - and I'm sure we're going to find out they weren't the only ones - look,
things have got to change in the way that they do business."
68. On or about April 29, 2010, the United States Justice Department opened a
criminal investigation into Goldman's arranged mortgage deals. The investigation followed a
criminal referral by the SEC and came a day after a group of 62 House lawmakers, including
Judiciary Committee Chairman John Conyers, asked the Justice Department to conduct a
criminal probe of Goldman. A letter sent to Attorney General Eric Holder from the lawmakers
stated: "On the face of the SEC filing, criminal fraud on a historic scale seems to have occurred
in this instance."
Case 1: 1 0-cv-03595-UA Document 1 Filed 04/30/2010 Page 34 of 43
69. On April 30, 2010, Bank of America Corp. downgraded Goldman stock to
"neutral" from "buy" and reduced its share-price estimate to $160 from $220. In addition,
Standard & Poor's ("S&P") downgraded shares of Goldman to sell from hold and trimmed their
price target to $140 from $180. S&P cited a Wall Street Journal report that said Goldman was
the target of a federal criminal probe into its mortgage dealings as the reason for the downgrade.
"Though traditionally difficult to prove, we think the risk of a formal securities fraud charge, on
top of the SEC fraud charge and pending legislation to reshape the financial industry, further
muddies Goldman's outlook." Goldman Sachs shares fell roughly 7% in early trading.
VII. CLASS ACTION ALLEGATIONS
70. Plaintiff brings this action as a class action pursuant to Federal Rules of Civil
Procedure 23(a) and 23(b)(3) on behalf of a class consisting of all persons or entities who (i) sold
Goldman put options that expired on April 16, 2010 or after, (ii) acquired Goldman common
stock pursuant to the exercise of sold put options and who held those shares as of April 16, 2010,
(iii) purchased Goldman call options that expired on April 16, 2010 or after, or (iv) acquired
Goldinan common stock pursuant to the exercise of purchased call options and who held those
shares as of April 16, 2010, and suffered damages thereby (the "Class"). Excluded from the
Class are defendants herein, members of the immediate families of each of the defendants, any
person, firm, trust, corporation, officer, director or other individual or entity in which any
defendant has a controlling interest, or which is related to or affiliated with any of the
defendants, and the legal representatives, agents, affiliates, heirs, successors-in-interest or
assigns of any such excluded party.
71. The members of the Class are so numerous that joinder of all members is
impracticable. Goldman options are actively traded on the CBOE in an efficient market. The
precise number of Class members is unknown to Plaintiff at this time but is believed to be in the
Case 1: 1 0-cv-03595-UA Document 1 Filed 04/30/2010 Page 35 of 43
thousands. Notice can be-provided to such record owners by a combination of published notice
and first-class mail, using techniques and a form of notice similar to those customarily used in
class actions arising under the federal securities laws.
72. Plaintiff will fairly and adequately represent and protect the interests of the
members of the Class. Plaintiff has retained competent counsel experienced in class action
litigation under the federal securities laws to further ensure such protection and intends to
prosecute this action vigorously.
73; Plaintiff's claims are typical of the claims of the other members of the Class
because Plaintiff's and all the Class members' damages arise from and were caused by the same
false and misleading representations and omissions made by or chargeable to defendants. Plaintiff
does not have any interests antagonistic to, or in conflict with, the Class.
74. A class action is superior to other available methods for the fair and efficient
adjudication of this controversy. Since the damages suffered by individual Class members may be
relatively small, the expense and burden of individual litigation make it virtually impossible for the
Class members to seek redress for the wrongful conduct alleged. Plaintiff knows of no difficulty
that will be encountered in the management of this litigation that would preclude its maintenance
as a class action.
75. Common questions of law and fact exist as to all members of the Class and
predominate over any questions affecting solely individual members of the Class. Among the
questions of law and fact common to the Class are:
A) whether the federal securities laws were violated by defendants' acts as
Case 1: 1 0-cv-03595-UA Document 1 Filed 04/30/2010 Page 36 of 43
B) whether statements made by defendants to-the investing public during the
Class Period misrepresented material facts about the nature of SEC investigations into
Goldman's business and operations
C) whether the price of Goldman common stock was artificially inflated
during the Class Period, as reflected in options premiums; and
D) to what extent the members of the Class have sustained damages and the
proper measure of damages.
VIII. NO SAFE HARBOR/ADDITIONAL SCIENTER
76. As alleged herein, the defendants acted with scienter because at the time that they
issued public documents and other statements in Goldman's name, they knew or recklessly
disregarded the fact that such statements were materially false and misleading, or omitted to
disclose material facts. Moreover, the defendants knew such documents and statements would
be issued or disseminated to the investing public, and knowingly and recklessly participated in
the issuance and dissemination of such statements and documents as primary violators of the
federal securities laws.
77. As set forth in detail above, the defendants, by virtue of their control over
Goldman and their positions with the Company, were privy to confidential proprietary
information concerning Goldman's role in the Abacus transaction and receipt of the Wells
Notice from the SEC. As such, defendants had knowledge of the false statements and omissions
78. Moreover, defendants had the motive and opportunity to commit fraud and
engage in a fraudulent scheme because, inter alia, in 2009, Goldman was the subject of
widespread media criticism concerning its transactions with troubled insurer American
Case 1: 1 0-cv-03595-UA Document 1 Filed 04/30/2010 Page 37 of 43
International Group; excessive employee compensation and bonus awards during the financial
crisis; and willingness to short the Housing market and profit from the economic collapse.
Defendants were actively attempting to repair Goldman's reputation when they received the
Wells Notice — and intended to keep the Wells Notice secret in order to prevent further erosion
of Goldman's public image. Defendants created, were informed of, participated in, and knew of,
the scheme alleged herein to distort and suppress material infonnation pertaining to Goldman's
role in Abacus and the SEC's investigation into the deal and the Wells Notice,
79. With respect to non-forward looking statements and omissions, the defendants
knew and recklessly disregarded the falsity and misleading nature of that information, which
they caused to be disseminated to the investing public. The statutory safe harbor provided for
forward-looking statements under certain circumstances does not apply to any of the false
statements pleaded in this Complaint. None of the statements pleaded herein are "forward-
looking" statements and no such statement was identified as a "forward-looking statement" when
made. Rather, the statements alleged herein to be false and misleading by affirmative
misstatement and/or omissions of material fact all relate to facts and conditions existing at the
time the statements were made. Moreover, cautionary statements, if any, did not identify
important factors that could cause actual results to differ materially from those in any putative
80. In the alternative, to the extent that the statutory safe harbor does apply to any
statement pleaded herein which is deemed to be forward-looking, the defendants are liable for
such false forward-looking statements because at the time each such statement was made, the
speaker actually knew and/or recklessly disregarded the fact that such fol-A ard-looking
statements were materially false or misleading and/or omitted facts necessary to make statements
Case 1: 1 0-cv-03595-UA Document 1 Filed 04/30/2010 Page 38 of 43
previously made not materially false and misleading, and/or that each such statement was
authorized and/or approved by a director and/or executive officer of Goldman who actually knew
or recklessly disregarded the fact that each such statement was false and/or misleading when
made. None of the historic or present tense statements made by the defendants was an
assumption underlying or relating to any plan, projection, or statement of future economic
performance, as they were not stated to be such an assumption underlying or relating to any
.projection or statement of future economic perfonuance when made, nor were any of the
projections or forecasts made by the defendants expressly related to . or stated to be dependent on
those historic or-present tense statements when made.
IX. • LOSS CAUSATION/ECONOMIC LOSS
81. During the Class Period, as detailed herein, the Individual Defendants made false
and misleading statements and engaged in a scheme to deceive the market and a course of
conduct that artificially inflated the prices of Goldman securities and operated as a fraud or
deceit on Class Period purchasers and sellers of Goldman stock options by misrepresenting the
Company's business and prospects. Later, when the Individual Defendants' prior
misrepresentations and fraudulent conduct became apparent to the market, the prices of Golch-nan
securities fell precipitously, as the prior artificial inflation came out of the price of the stock. As
a result of their purchases of Goldman put and call options during the Class Period, Plaintiff and
other members of the Class suffered economic loss, i.e., darnages, under the federal securities
Case 1: 1 0-cv-03595-UA Document 1 Filed 04/30/2010 Page 39 of 43
FIRST CAUSE OF ACTION
For Violation Of § 10(b) Of The Exchange Act
And Rule 10b-5 Promulgated Thereunder
(Against All Defendants)
82. Plaintiff repeats and realleges each and every allegation above as if set forth in
83. Statements made by Goldman and the Individual Defendants during the Class
Period were materially false and misleading, and defendants knew or were reckless in not
knowing they were so, because defendants prepared and participated in the issuance of the
deceptive and materially false and misleading statements to the investing public, as set forth
84. Defendants employed devices, schemes, and artifices to defraud and engaged in
acts, practices, and a course of conduct in an effort to maintain artificially high market prices for
Goldman securities in violation of section 10(b) of the Exchange Act and SEC Rule 10b-5.
85. As a result of the dissemination of these false and misleading statements, the
market price of the securities of Goldman throughout the Class Period was higher than they
would have been had the true facts concerning the Company's financial condition been known
by the market.
86. In ignorance of the artificially high market prices of Goldman's publicly traded
securities, and relying upon the integrity of the markets in which those securities were traded,
Plaintiff and other members of the Class acquired Goldman securities during the Class Period at
artificially inflated prices and were unable to recover that inflation and were damaged thereby.
87. Had the market Clown of the true condition of Goldman's business, which was
falsely represented by defendants, Plaintiff and other members of the Class would not have
purchased or otherwise acquired their Goldman securities during the Class Period at artificially
Case 1: 1 0-cv-03595-UA Document 1 Filed 04/30/2010 Page 40 of 43
inflated prices. Hence, Plaintiff and the other members of the Class were damaged by
defendants' violations of Section 10(b) and Rule 10b-5.
SECOND CAUSE OF ACTION
For Violation Of § 20(a) Of The Exchange Act
(Against The Individual Defendants)
88. Plaintiff repeats and realleges each and every allegation above as if set forth in
89. This claim is asserted against the Individual Defendants and is based on section
20(a) of the Exchange Act. Individual Defendants acted as controlling persons of Goldman
within the meaning of section 20(a) of the Exchange Act. By reason of their positions as officers
and directors of Goldman and ownership of Goldman securities, the Individual Defendants had
the power and authority to cause or to prevent the wrongful conduct described herein and did
exercise such power and authority.
90. By reason of the foregoing, Individual Defendants are liable jointly and severally
with and to the same extent as Goldman for Goldman's violations of section 10(b) of the
Exchange Act and Rule 10b-5.
91. WHEREFORE, Plaintiff, on behalf of herself and the Class, prays for relief and
judgment as follows:
A) Declaring this action properly maintainable as a class action pursuant to
rules 23(a) and 23(b)(3) of the Federal Rules of Civil Procedure and declaring Plaintiff to be a
proper representative of the Class;
B) Awarding Plaintiff and the other members of the Class damages in an
amount to be proven at trial, together with prejudgment interest thereon;
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C) Awarding Plaintiff the costs and expenses incurred in this action,
including reasonable attorneys' and experts' fees; and
D) Granting Plaintiff and the other members of the Class such other and
ftuther relief as the Court deems just and proper.
Plaintiff hereby demands a trial by jury.
Dated: New York, New York
April 30, 2010 WOLF PO r ER LLP
MARIAN P. ROSNER
ROBERT C. FINKEL
JAMES A. HARROD
ROBERT S. PLOSKY
845 Third Avenue, 12th Floor
New York, NY 10022
Tel: (212) 759.4600
Fax: (212) 486-2093
rf nkel@wolfpopper. com
Case 1: 1 0-cv-03595-UA Document 1 Filed 04/30/2010 Page 42 of 43
1, Tikva Bochner, hereby state:
1. I have reviewed the complaint against Goldman Sachs Group, Inc. ("Goldman"),
and certain of its senior officers and directors, entitled Bochner v. Goldman Sachs Group, Inc., et
al., and have authorized the filing of the complaint on my behalf by Wolf Popper LLP.
2. I did not purchase the securities that are the subject of the action at the direction
of counsel or in order to participate in this private action.
3. I am willing to serve as a representative party on behalf of a class, including
providing testimony at deposition and trial, if necessary.
4. During the Class Period alleged in the Complaint, I trade the following
transactions in Goldman stock options;
See Attached Transaction Schedule.
5. During the three-year period preceding the date of my signing this certification,
I have not filed a complaint as a representative on behalf of a class or sought to serve as a lead
plaintiff in any action under the federal securities laws.
6. I will not accept any payment for serving as a representative party on behalf of a
class except to receive any pro rata share of any recovery, or as ordered or approved by the
Court, including the award to a representative party of reasonable costs and expenses including
lost wages relating to the representation of the class.
I declare under penalty of perjury that the foregoing is true and correct,
Executed this day ofApril, 2010
Case 1: 1 0-cv-03595-UA Document 1 Filed 04/30/2010 Page 43 of 43
Tikva Bochner's Transactions in Goldman Sachs Securities
(all prices are per share)
Date Transaction Type Quantity* Transaction Description
11/13/09 Sell 25 Nov'09 $175 Puts @ $1.83
11/18/09 Sell 25 Nov '09 $175 Puts @ $1,44
11/23/10 Buy 5,000** Common Shares @ $175.00
01/14/10 Sell 10 Jan 16'10 $175 Call @ 0. 18
01/14/10 Sell 40 Jan 16 '10$175 Call @ 0.18
02/01/10 Sell 50 Feb 20'10 $175 Call @ $0.25
03/05/10 Sell 50 Mar 20'10 $175 Call @ $0.75
03/15/10 Buy 18 Mar 20'10$175 Call @ $0.85
03/15/10 Buy 29 Mar 20'10 $175 Call @ $0.85
03/15/10 Buy 3 Mar 20'10 $175 Call @ $0.85
03/16/10 Sell 50 Mar 2010 $180 Cali @ $0.25
03/25/10 Buy 50 Apr 17 10 $180 Call @ $2.82
03/25/10 Sell 50 Apr 17 '10 $180 Call @ $3.00
03/26/10 Buy 26 Apr 17'10 $175 Call a@7 $3.65
03/26/10 Buy 31 Apr 17'10 $175 Call @ $3.65
03/26/10 Buy 43 Apr 17'10 $175 Call @ $3.65
* Quantity of options is designated in contracts, where each contract equals 100
** Shares of common stock.