Tuesday, November 8, 2011

Defunct Basis Capital Sues Goldman Sachs

Australian hedge fund Basis Capital has revitalized its lawsuit against Goldman Sachs by filing a timely complaint in the New York State Supreme Court. Basis Capital alleges that Goldman Sachs knowingly made fraudulent statements in two collateralized-debt-obligation (CDO) securities sales. Because of these alleged fraudulent statements by Goldman Sachs, Basis Capital claims that it collapsed. The fund is suing for $67 million in compensatory damages and $1 billion in punitive damages. “Its summons complaint argues that Goldman took undisclosed short positions against its own clients and that the firm engaged in an aggressive marketing campaign, fully aware of the risk involved in investing at a time when subprimes were declining.”

While Goldman Sachs has responded that it “acted appropriately and refute[s]” any indication of false misrepresentation, the complaint alleges that Goldman pushed a strategy to invest in its subprime residential home mortgage-based vehicles—Point Pleasant and Timberwolf, which were specifically manufactured to perform poorly. In light of a U.S. Senate report in April 2011, the allegations (and the report) claim that Goldman Sachs was touting these products, even though it expected them to fail. According to Basis Capital, these products ended as toxic inventory, and consequently, brought down their $1 billion hedge fund with it.

17 comments:

  1. Jessica Bradley (Memphis Law)November 11, 2011 at 5:31 PM

    This seems like a classic case of a breach of fiduciary duty. Internal documents indicate that Goldman knew this was a "shitty deal", but they continued to frame the Point Pleasant and Timberwolf investments to Basis Capital as a great deal. The senate report indicates that Goldman alone knew about the toxicity of the investment. Acting as an agent of Basis Capital in the deal, Goldman had a duty to disclose this information. No good faith existed on Goldman Sachs' end, and hopefully they will be held liable to the full extent of the law.

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  2. Indeed, this is a classic case of a breech of a fidudiary duty. I am glad that this sepcific example has come to light. This is a big case because of the amount of money at stake in Basis Capital. However, these practices are far more prevalent in the multitudes of smaller deals that go through. In many cases, investors may not even be aware that banks have breeched their fiduciary duties by giving them bad information. I hope that this case brings attention to those cases and that more regulatory controls are put in place.

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  3. Natasha__Memphis LawNovember 17, 2011 at 3:45 PM

    Upon first glance, it appears as if the allegations of Basis, if true would establish a 10(b) claim, if Goldman employed fraud in connection with the sale of securities, but the prior complaint was dismissed from the District Court for failure to qualify as a domestic transaction. So perhaps 10(b) is not invoked where there is no domestic transaction. Undeterred, however, Basis then refiled the complaint in state court under a fraud claim.

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  4. I fully agree with Ms. Reeves. I appears to be a classic case of a breach of fiduciary duty. It seems that many of those types of cases have been largely shielded, and thus precluding action taken against them. Ms. Bradley brings the point of internal documents. The so-called "internal documents" often shed light on the truth of motives behind many corporate actions. Internal communication does have a level of protection from disclosure. But if breaches are largely shielded, how would an outsider even know of the existence of such communication? There has to be suspicion of enough degree to prompt disclosure, either though public pressure or discovery during litigation.

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  5. This case is particularly reprehensible because Goldman's actions went beyond ordinary fraud. It's one thing (read: definitely bad) to misrepresent information and push toxic assets off on unsuspecting clients. It's quite another (read: appalling and disturbing) for Goldman to take a short position on these assets, essentially hoping to profit from their failure, while simultaneously marketing them aggressively to investors.

    As Spencer points out, the problem will be gathering enough proof to show Goldman's true knowledge and motives at the time they were unloading the Timberwoof and Point Pleasant deal to Basis Capital. Much of this evidence exists only internally and will most likely be protected.

    It's unsettling to think of the frequency these kinds of situations likely occur within the market because they do not arouse suspicion or cannot be proved due to internal and external control and protection of material information.

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  6. NatalieB_MemphisLawNovember 20, 2011 at 7:35 PM

    Natasha, I was also curious whether this situation would establish a 10(b) claim, and you were right about 10(b). I did some research, and in June of 2010, in Morrison v. National Australia Bank Ltd., the US Supreme Court held that 10(b) only applies to transactions in securities listed on domestic securities exchanges and domestic transactions in unregistered securities. I agree with everyone else that if the facts alleged are true, Basis should be able to recover for a breach of fiduciary duty; the facts indicate that Basis could recover if Goldman Sachs expected the products to fail.

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  7. Caroline (Memphis Law)November 20, 2011 at 7:52 PM

    This is a classic fiduciary duty claim and I also think a 10b claim could be brought by the SEC. If Goldman Sachs knew that the real estate was going to fail and strategically marketed them to companies to invest in them knowing of their failure I think that they have violated Rule 10b prohibiting fraud or deceit in dealings. Also, I think that this is a breach of fiduciary duty by Goldman Sachs. They misrepresented its investment plans and marketed bad plans, in turn recruiting investors to invest in these bad plans and lose money. I think the the shareholders will be able to bring a derivative suit against the company for the misrepresentations that Goldman Sachs gave them. I also agree with everyone that if the facts alleged are true, Basis should be able to recover damages here because Goldman Sachs expected the products to fail and did not represented this to Basis but represented the product as being something that was going to successful and that was a sound investment.

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  8. Andrew H - Memphis LawNovember 20, 2011 at 8:20 PM

    As a lot of my classmates have stated, this is a classic scenario of the fiduciary duties. I don't think there's any more to be said about that.

    However, I would like to applaud the plaintiffs in this case. While there are always criminal actions that can punish a bad acting entity, nothing serves better than hitting them in the wallet.

    Sure, banks like Goldman Sachs have the money to cover their liability, but judgments against them in millions of dollars makes a difference. It may stop them from acting in such ways in the future.

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  9. Agreeing with most, if not all that has been said by my classmates, I am led to question the sanity of Goldman Sachs. I know every corporation is always looking to score big, especially in this economy, but it seems that these corporations have no standards. Goldman Sachs has been in hot water many times before, so why continue with such "toxic" behavior? Breaching fiduciary duties and leading clients down a path of destruction not only hurts them, but it also hurts Goldman Sachs. Sure, they can pay the damages with what is in their "deep pockets" but do they not realize the damage that is continually done to their reputation? They might be leading others down paths of destruction, but I hope they will ultimately be the ones drowning in their own misfortunes- they must learn that they cannot continue with this terrible behavior!

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  10. Jessie_C Memphis LawNovember 21, 2011 at 7:20 PM

    I agree with most of what has been said so far. This is a clear breach of fiduciary duty. An agent cannot lie and misrepresent information or take secret profits from the principle. Here that was clearly the issue here.

    Just as http://legal.practitioner.com/regulation/standards_9_3_6.htm states:

    "It is often easier to make out a claim for a breach of fiduciary duty than fraud."

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  11. A lot of comments have already hit on clear breach of fiduciary duty. Obviously, Goldman Sachs will be held liable and accountable if the allegations are proven true.

    However, I guess I have more of a question about the lawsuit than anything else. Are the officers and directors of Goldman Sachs being sued personally for the conduct? It seems like most of these major Wall Street banks that conducted themselves inappropriately have shielded the officers and directors making the final decisions that lead to such blatant fraud, misrepresentation, and breach as evident in this case. I would just like to make sure litigation pursues the individuals who pull the trigger, not just the gun itself.

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  12. I agree that the individuals and the corporations should be held liable. I guess this is more of a concern about the suit as well; because if they defendants were all sued in one suit as it seems to me, then they are going to be jointly and severally liable. In essence, that means that the deep pocket corporations will foot the bill and the individual people will have no repercussions except for the embarrassment of being found guilty of a breach of a fiduciary duty, if they feel any embarrassment. My advice would be to sever the suits and try each case separately. Yes, this would involve more litigation and more fees, but just maybe this would deter this kind of behavior in the future.

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  13. Gray N. Memphis LawNovember 28, 2011 at 3:50 PM

    If the allegations by Basis against Goldman Sachs are proven to be true, then Goldman Sachs clearly violated its fiduciary duty in this situation. As an agent for Basis, Goldman Sachs has a duty to disclose the information (only known to Goldman Sachs) that the mortgages were "toxic". By keeping their principal, Basis, in the dark, Goldman Sachs was able to obtain secret profits in the transaction. Secret profits gained by an agent are always an indication of a breach of fiduciary duty.

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  14. Izabela M- Memphis LawNovember 28, 2011 at 11:06 PM

    I agree with the comments above that if Goldman Sachs is guilty of breaching its fiduciary duty they must be held accountable to the full extent of the law. I feel no sympathy for the amount of money they will lose because they truly need to be made an example of. Hopefully this will act as a deterrence to others in the future.

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  15. Salwa (Memphis Law)November 29, 2011 at 4:12 AM

    As noted by others, this is a classic case of breach of fiduciary duties. By masking the true facts of the national debt, Goldman Sachs has engaged in misrepresentation, and Basis Capital should receive damages that would be needed to put it in the position it would have been in had the misrepresentation not happened. And I agree with Josh T. Considering this isn't the first time something similar to this happened with Goldman Sachs (insider trading cases in the past), maybe this suit will in fact deter such actions.

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  16. jessica s - memphis lawNovember 29, 2011 at 12:22 PM

    I think Elizabeth's comment hits most squarely with my thoughts about Goldman Sachs. It really does come down to a question of their integrity and as a company who repeatedly breaches fiduciary duties, it seems their integrity is dwindling. I am continually amazed when I see how large companies seem to think that their money can fix any situation. The problem is that they do it and they get away with it. I hope that companies who conduct business like GS are increasingly held accountable until it gets to a point where it becomes obvious to them that conduct like they are used to engaging in will no longer be tolerated.

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  17. Melissa T (Memphis Law)November 29, 2011 at 12:50 PM

    I agree with the others that this is a breach of fiduciary duty. I also fully agree with Andrew. Hit them where it hurts!

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