The big bill for Goldman? Shareholder class actions, not the SEC case. But suing won’t be easy

Goldman vulnerable? Don’t ask plaintiff lawyers

NEW YORK — Angry at Goldman Sachs for the billions in shareholder wealth lost since the government accused it of fraud?

Well, if you’re looking to file a class action against the bank, legal experts have some advice: You’ve got your work cut out for you.

For one thing, we’re in the midst of one of the biggest bull markets in history. In a securities class action, plaintiff lawyers need to show investors have lost big money. And while a few recent investors may face steep losses, many owners of Goldman shares are up smartly.

Since the government filed suit on April 16 alleging civil fraud, Goldman’s stock has dropped nearly 16 percent. Its shares also are 37 percent below the record high of $250.70 set at the end of October 2007, but if you bought shares over the last 12 months you’re probably sitting on gains. The stock is up 31 percent in the past year.

The stock could be under more pressure this week depending on the testimony of Goldman CEO Lloyd Blankfein and Fabrice Tourre, a trader named in the civil case, at a Senate hearing. They and other executives will appear Tuesday in front of the Senate Permanent Subcommittee on Investigations.

Goldman and the subcommittee released e-mail and internal documents on Saturday that shed light into how the firm was dealing with the collapse of the subprime mortgage market in 2007. In one of those e-mails, Tourre told an unidentified woman that mortgage investments he had sold were “like Frankenstein turning against his own inventor.”

In another, Goldman executive Donald Mullen wrote that bets by Goldman against the housing market would pay off. “Sounds like we will make serious money,” he wrote to a colleague.

A Goldman official on Saturday said the contents of some of the emails was embarrassing but showed no evidence of wrongdoing. Goldman says it lost $1.2 billion in the residential mortgage market during 2007 and 2008.

The Securities and Exchange Commission claims Goldman and Tourre misled investors by failing to disclose important information about a complicated mortgage securities deal that might have scared off investors. Goldman allegedly didn’t tell investors that one of its clients was betting against the securities. Goldman also opted not to tell investors months ago that it might face civil charges by the SEC.

Class action lawsuits claim to represent a large group. At one time, lawyers could find a shareholder with losses to represent the class. But a law favoring big shareholders as “lead plaintiffs” means lawyers now face a long and difficult hunt if they don’t have a big pool of aggrieved investors to choose from.

That doesn’t mean Goldman is free and clear.

A pair of shareholders Friday sued Blankfein and the entire board over those ill-fated mortgage deals at the center of the government case.

Gerald Silk of powerhouse plaintiff firm Bernstein Litowitz Berger & Grossmann says he’s received “multiple” inquiries from Goldman shareholders around the world about filing a case.

And though the government suit has drawn a lot of attention, a Credit Suisse report last week suggests bigger financial risks lie elsewhere.

A Credit Suisse analyst says Goldman and other banks still could face high litigation costs tied to the housing bust from private suits. This could exceed the money the banks spend defending themselves from cases brought by regulators.

Exhibit A: The dot-com debacle.

Credit Suisse estimates that banks paid twice as much in private litigation in the aftermath of the dot-com bust than they did settling cases with regulators. The report did not have a breakdown of the exact cost of the dot-com litigation.

Lawyers say shareholder lawsuits against Goldman are likely to focus on its decision not to tell investors it had been warned by the SEC last summer that the agency might file civil fraud charges.

Companies are not required to alert investors of a such warnings, which are called Wells notices. But some do, fearing shareholder suits if the SEC does file and their stock falls.

On a conference call to discuss earnings last Tuesday, Goldman dismissed the notion its reporting was inadequate.

“We do not disclose every Wells we get simply because that wouldn’t make sense,” said Goldman general counsel Gregory Palm. “We just disclose it if we consider it to be material.”

The law making it tougher for plaintiff lawyers to file class actions is called the Private Securities Litigation Reform Act. Passed in 1995, it was intended to stop lawyers from pursuing securities fraud cases on flimsy evidence, and then subjecting defendants to long and costly “discovery” periods during which they would demand numerous documents and depositions.

Companies would often choose to settle rather than endure that process.

The law also made it difficult to get a judge to grant coveted “lead plaintiff” status to small shareholders. Law firms compete to represent a “lead plaintiff” because that makes it more likely they’ll get the lion’s share of fees if they win or settle.

The two suits filed Friday by shareholders Robert Rosinek and Morton Spiegel accuse Blankfein and other officers of “systematic failure” over 3 1/2 years for not properly vetting 23 mortgage-linked deals at the center of the SEC suit. Those deals, called Abacus, led to $1 billion in losses.