OUR BLOG ON:
The Goldman Sachs “Sell-Out”*
Conflicts of Interest and Investors’ Rights
There are several lessons to be learned from the efforts made by the United States Security Exchange Commission (SEC) to pursue Goldman Sachs for allegations that it defrauded investors by failing to disclose conflicts of interest in mortgage investments it sold while the housing market was faltering.
SEC investigators allege that Goldman Sachs sold to a client a package of mortgages that another client had deliberately structured to decline in value. In other words, Goldman Sachs knowingly served as the "middleman" between the purchaser and the seller of those mortgages.
In a press release detailing the allegations (sec.gov/news/press/2010/2010-59.htm), the SEC stated, "Goldman wrongly permitted a client betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party." Goldman Sachs has countered that the client in question was itself a large institution, conducting its own due diligence, and that Goldman Sachs did not withhold any important information from its other client.
The Legal Question
Lawyers will generally agree that middlemen such as Goldman Sachs must make full disclosure of all material facts to their clients. If it was important to the purchaser to know that one of the people who influenced the creation of the investment believed it would fail, and if Goldman Sachs knew that this fact was important to the purchaser, it would be highly improper for Goldman Sachs to withhold that information from the purchaser.
The Investment Lesson
The lesson to be learned from this by the retail investor has three important elements:
- Financial advisors are governed by ethical rules that compel them to act honestly and in good faith.
- This duty to act honestly applies regardless of the nature of the contract for services between the advisor and the client. It is true for institutional investors as it is for individual consumer clients, and for discount brokerage accounts as it is for discretionary portfolio management accounts.
- The regulator (in this case the SEC) will lay charges where it has concluded the advisor has broken the rules. These charges do not, by themselves, create compensation for the injured client. The client can and must pursue damages for breach of the ethical standard. However, a positive finding by the regulator that the advisor has broken the rules will often lead to a damage award, if the breach caused the damages.
If you have suffered a loss due to the unethical conduct of a financial advisor, you should contact a lawyer to discuss your right to compensation. John Hollander & Harold Geller are lawyers who are experienced at assessing potential claims and seeking financial recovery on behalf of clients who have suffered losses as a result of the negligence of their advisors. To date, 90% of the claims we have pursued have been settled in favour of our clients. To see if we can help you, contact us for a free, no-obligation initial consultation.
* What the SEC claims to have occurred has not yet been proved. The author of this article has no knowledge of what Goldman Sachs did or did not do, apart from what has been reported by the media to the general public.
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