The issue of what’s material has popped up a second time in the Goldman Sachs & Co. imbroglio, this time in the form of a shareholder lawsuit.
What’s material for a buyer to know is at the heart of the Securities and Exchange Commission’s civil fraud charges against Goldman and one employee. The SEC says buyers of a synthetic collateralized debt obligation should have been told that choosing the underlying mortgages was partly the handiwork of the hedge fund Paulson & Co., which was betting against the buyers.
Goldman has vehemently denied that it has done anything wrong.
Now a more standard case of disclosure emanates from the SEC investigation and the eventual charges. A shareholder suit, which seeks class-action status, was filed today against Goldman.
It argues Goldman shareholders should have been told the securities firm recieved a so-called Wells notice from the SEC, indicating civil charges were quite possibly coming.
It’s easy to say in layman’s terms that, sure, Goldman shareholders would have liked to have been told this. The Wells notice essentially gives a firm one last chance to make a convincing case that civil charges should not be brought.
In legal terms it will no doubt be tougher. Among the relevant questions: how important in tangible terms is this whole episode to the prosperous investment bank’s overall financial status?
The SEC’s past statements on the sometimes elusive nature of materiality include this: something is material if “there’s a substantial likelihood that a reasonable shareholder would consider it important” in making investment decisions.
The Wall Street Journal quotes Darren Robbins, an attorney with Robbins Geller Rudman & Dowd LLP, who is representing the shareholder who filed the suit, this way: the Wells notice was “something shareholders would want to know.”
The same Journal article said a Goldman spokesman didn’t immediately return a message seeking comment.
Goldman’s far from the only firm to have received a Wells notice and then had subsequent SEC charges brought against it.
The SEC has always wanted to avoid so-called bright line definitions of what’s material. But it seems pretty simple, again, in layman’s terms, for the watchdog agency to tell public companies that if and when they get a Wells notice they ought to disclose it.
It would save everyone a lot of grief and litigation.