The Role of Ethics in Shareholder Security: Doomed or Destined?

Embroiled in yet another legal debacle, as of December 2020 Goldman Sachs Group Inc. (Goldman Sachs) is immersed in a securities class action litigation in front of the United States Supreme Court – Goldman Sachs Group Inc. v. Arkansas Teacher Retirement System.

Beginning with the financial crisis in 2007 – 2008, Goldman Sachs’ shareholders lost millions of dollars after the bank successfully marketed “a synthetic collateralized debt obligation” (CDO) known as “Abacus” that ultimately failed and led to a widespread Securities and Exchange Commission (SEC) investigation. Goldman Sachs neglected to inform shareholders of the investment’s unlikelihood to yield strong returns, and instead ignored clear conflicts of interest and relied on vague, overly broad ethics statements to convince investors of their effective transparency, corporate governance, and accountability mechanisms. Goldman Sachs had reason to know that the hedge fund manager who played a part in orchestrating the portfolio “of subprime mortgages” wagered the investment would fail. The CDO’s collapse led to a $1 billion payout for the manager, and a comparable loss for Goldman Sachs customers, further exacerbated by the negative impact on the stock price from the SEC investigation.

This inundation of financial jargon, and summary of Goldman Sachs’ decade-long flirtation with securities fraud, culminates with the ensuing class-action litigation involving the Arkansas Teacher Retirement System as well as a pension fund – two entities devastated by the impact of the failed investment and allegations of fraud.

The litigation addresses the legal question of “whether a securities defendant can rebut a presumption that the class relied on alleged misleading statements by pointing to their generic nature.” The Court’s holding will impact class action procedures such that future plaintiffs could more easily bring, and win, securities-fraud lawsuits by referencing major corporate entities’ blanket language regarding their integrity, transparency and honesty towards shareholders. At the risk of espousing dangerously anti-capitalist views, it is worth noting that such a holding could “open the floodgates” for costly and arguably unnecessary litigation or rather incentivize companies to “stay silent.

As noted by several experts, this litigation begs the question: how will the future holding impact the rigidity, efficacy and enforceability of corporate governance and legal ethics practices going forward? But as a current first-year law student, and a shareholder and future shareholder, I cannot help but ask how this litigation – and the light shed on such opaque governance and financial practices by leading corporations – will impact the actions of the everyday investor. And, perhaps unrelatedly, it makes me wonder how phenomena out of our control, such as a global pandemic, could potentially influence companies’ likelihood to mislead investors for the sake of healthy portfolio performance to benefit the elite?

Over the past thirty years, class-action securities fraud cases dramatically increased, with the hope of compensating victims of misleading statements and deterring additional fraudulent activity. With a more conservative Supreme Court majority, potentially inclined to direct the resolution of these complex issues to the legislature, how will the holding of this case impact the already tenuous relationship between corporate entities and their shareholders?