By Pam Martens and Russ Martens: February 28, 2023 ~
As we reported on February 7, there are some very strange things going on at Goldman Sachs.
After reading the Wall Street investment bank’s annual report, which was filed with the Securities and Exchange Commission last Friday, the word “strange” doesn’t seem to do justice to the situation. Goldman Sachs is looking more like a litigation warehouse these days than an investment bank.
According to Goldman’s annual report, it is being investigated for pretty much everything it does to make money: derivatives, currencies, mortgages, financial advisory, securities lending, dark pools, investment management, commodities, U.S. Treasuries, corporate bonds, credit cards, hiring and compensation practices, research practices, compliance with the Foreign Corrupt Practices Act, transactions involving government-related financings – and on and on.
Things are so bad that it concedes in this annual report that it may have under-reserved for its legal costs by $2.3 billion. That’s a pretty big number to fail to anticipate – especially when your Chairman and CEO, David Solomon, has a side hustle as a DJ at tiki bars.
Particularly unnerving is the revelation that Goldman Sachs is being sued for its work as one of the underwriters of 27 separate share offerings, many of which have declined dramatically in share price. (The lawsuits actually total 28 but we have not included the lawsuit involving Waterdrop Inc. as Goldman Sachs reports it was dismissed by the U.S. District Court for the Southern District of New York on February 3.)
The lawsuits involve the following stocks, listed in the order that they appear in the Goldman Sachs annual report. We have added ticker symbols in parenthesis following the company name:
Uber Technologies, Inc. (UBER); GoHealth, Inc. (GOCO); Array Technologies, Inc. (ARRY); ContextLogic Inc. (WISH); DiDi Global Inc. (DIDIY); Vroom Inc. (VRM); Zymergen Inc. (acquired by Ginkgo Bioworks); Sea Limited (SE); Rivian Automotive Inc. (RIVN); Natera Inc. (NTRA); Robinhood Markets, Inc. (HOOD); ON24, Inc. (ONTF); Riskified Ltd. (RSKD); Oscar Health, Inc. (OSCR); Oak Street Health, Inc. (OSH); Reata Pharmaceuticals, Inc. (RETA); Bright Health Group, Inc. (BHG); 17 Education & Technology Group, Inc. (YQ); LifeStance Health Group, Inc. (LFST); MINISO Group Holding Limited (MNSO); Coupang, Inc. (CPNG); Yatsen Holding Ltd. (YSG); Rent the Runway, Inc. (RENT); Opendoor Technologies Inc. (OPEN); FIGS, Inc. (FIGS); Silvergate Capital Corporation (SI); Centessa Pharmaceuticals plc (CNTA).
Five of these companies’ share prices have declined by 75 percent to 90 percent over the past year. (See chart below.)
All of this negative news comes a little more than two years after Goldman Sachs and a subsidiary were criminally charged by the U.S. Department of Justice in the looting and bribery scandal known as 1MDB – the largest scandal in the firm’s history. Goldman Sachs admitted to the charges and had to pay over $2.9 billion. There have been plenty of other warning signs over the past decade that Goldman Sachs was on the wrong track with its reputation.
In 2018 former New York Fed bank examiner, Carmen Segarra, released her book, Noncompliant: A Lone Whistleblower Exposes the Giants of Wall Street. The main giant Segarra was exposing was Goldman Sachs and its enshrined conflicts of interest. When Segarra wanted to write a negative examination of what she found at Goldman Sachs, she was fired as a bank examiner by the crony bosses at the New York Fed.
An earlier book was penned in 2012 by a former Vice President at Goldman Sachs. In Why I Left Goldman Sachs: A Wall Street Story, Greg Smith exposes a culture of ripping off clients. In tandem with the book launch, Smith explained this culture to the approximate 13 million viewers of 60 Minutes.
Greg Smith is the Goldman Sachs VP who tendered his resignation after 12 years with the firm on March 14, 2012 via the OpEd page of the New York Times, famously lamenting “how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as ‘muppets.’ ”
On April 16, 2010, two years before Greg Smith made his charges, the Securities and Exchange Commission made the identical charge: Goldman was ripping off its clients. Here’s the actual wording of the complaint:
“Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc…played a significant role in the portfolio selection process. After participating in the selection of the reference portfolio, Paulson effectively shorted the RMBS [Residential Mortgage Backed Securities] portfolio it helped select by entering into credit default swaps (‘CDS’) with GS&Co [Goldman Sachs & Company] to buy protection on specific layers of the ABACUS 2007-AC1 capital structure. Given its financial short interest, Paulson had an economic incentive to choose RMBS that it expected to experience credit events in the near future. GS&Co did not disclose Paulson’s adverse economic interests or its role in the portfolio selection process in the term sheet, flip book, offering memorandum or other marketing materials provided to investors.”
To put all that in plain English, the SEC charged Goldman Sachs with knowingly creating an investment product designed to fail so that a hedge fund manager could benefit by shorting it and then sold it to its clients as a good investment. Goldman settled that complaint for $550 million, at that time the largest penalty ever imposed by the SEC on a Wall Street firm.