A Financial Industry Regulatory Authority (“FINRA”) arbitration panel recently ordered Goldman Sachs Inc. (“Goldman”) to pay $80 million in compensatory damages plus millions more in interest to National Australia Bank Ltd. (“NAB”), resulting in an award likely to cost Goldman (GS) more than $100 million. According to the award and NAB’s complaint, Goldman sold NAB several collateralized debt obligations (“CDOs”), including the Hudson Mezzanine Funding 2006-1 Ltd.
In particular, NAB paid $80 million for its stake in Hudson Mezzanine Funding, a Goldman-backed product, shortly before the financial crisis began. The investments failed when the market for CDOs and other asset backed securities fell apart in 2007 and 2008. In 2011, a U.S. senate report disclosed that while pitching Hudson Mezzanine Funding, Goldman did not tell investors such as NAB that it was betting against the assets supporting Hudson and other CDOs. As a result, according to NAB’s attorneys, when the economic crisis ensued, Goldman profited from the Hudson CDO while NAB and other investors lost all of their investment.
In its complaint, NAB contended that the mortgage-related deal posed a substantial conflict of interest between Goldman and its clients, and, therefore, Goldman was required under FINRA rules to disclose the conflict. Goldman argued it had no such disclosure obligation and, in fact, filed a counterclaim against NAB.
The FINRA arbitration panel, in its May 7 ruling, found in favor of NAB and specifically stated “there were knowing and material omissions and misstatements in the marketing materials … that masked a significant conflict of interest with [Goldman’s] clients.” As a result, the panel determined “National Australia Bank Limited is entitled to the return of its $80 million investment.”
This is not the first time Goldman has been forced to pay nine figures for selling institutional investors clearly conflicted products. In 2010, Goldman Sachs consented to pay $550 million to resolve U.S. Securities and Exchange Commission charges accusing the firm of misleading investors by omitting and misstating key facts about the ABACUS 2007-AC1, a synthetic collateralized debt obligation that it promoted. Goldman did not disclose the role of hedge fund Paulson & Co. in making portfolio choices or that Paulson took a short position against the collateralized debt security. It was ultimately found the Goldman marketing materials for the CDO did not have complete information and that Paulson’s economic interest, when making choices for the portfolio, were adverse to investors.
Shepherd, Smith, Edwards & Kantas is a national law firm that represents individual and institutional clients in high stakes securities litigation and arbitration claims. Our attorneys have over 100 collective years of securities industry and legal experience, resulting in our firm being uniquely qualified to help investors in complex securities cases. Please contact our office for a free, no obligation consultation if you have a significant securities loss and suspect there was wrongdoing.
Goldman Sachs Ordered to Pay $80 Million Plus Interest in Mortgage Case, The Wall Street Journal, May 11, 2015
Goldman Must Pay National Australia $80 Million, Panel Says, Bloomberg, May 11, 2015