Bloomberg News

Goldman Sachs Investor Lawsuit Over Pay Plan Dismissed

October 13, 2011

(Updates with details on New York case’s dismissal starting in 12th paragraph.)

Oct. 13 (Bloomberg) -- Goldman Sachs Group Inc. persuaded a judge to throw out shareholders’ claims that the investment bank’s compensation system improperly rewarded employees for taking risks that hurt the firm’s stock price.

Delaware Chancery Court Judge Sam Glasscock concluded yesterday that Goldman Sachs’s board acted properly in setting up a pay plan for the fifth-biggest U.S. bank. The judge dismissed a consolidated investor lawsuit claiming the plan wrongly awarded billions of dollars in bonuses to executives and employees, including Chairman Lloyd Blankfein, even as the firm’s market value declined by $50 billion since 1999.

Delaware law “provides corporate directors and officers with broad discretion to act as they find appropriate in the conduct of corporate affairs” and “in the exercise of their business judgment on behalf of the corporation,” Glasscock wrote in a 67-page opinion.

Goldman Sachs, which set a Wall Street pay record in 2007, faced criticism from politicians and labor unions for its compensation practices after getting taxpayer aid during the financial crisis.

In July, Goldman Sachs officials set aside $8.44 billion for the New York-based company’s compensation pool in the first six months of this year, according to its website. That was 9 percent less than in the same period in 2010 as revenue tumbled 11 percent.

‘Limited Value’

“The complaint fails to present facts that demonstrate that the work done by Goldman’s 31,000 employees was of such limited value to the corporation that no reasonable person in the directors’ position would have approved their levels of compensation,” Glasscock said.

Lawyers for the Southeastern Pennsylvania Transportation Authority, the operator of Philadelphia’s bus and rail network and a Goldman Sachs shareholder, argued that the firm’s board should be held accountable for not properly overseeing the compensation system and employees’ wrongful conduct.

Septa’s lawyers said in court filings that Goldman Sachs officials received billions of dollars in pay and bonuses last year, while the firm settled U.S. Securities and Exchange Commission claims that executives misled investors in collateralized debt obligations linked to subprime mortgages.

$550 Million Penalty

Goldman Sachs agreed to pay $550 million, the largest penalty ever levied by the SEC against a Wall Street firm, to resolve claims that marketing materials about the investments had “incomplete information.”

Goldman Sachs created and sold the CDOs in 2007 as the U.S. housing market faltered, without disclosing that a hedge fund helped pick the underlying securities and then bet against the investment vehicles, the SEC said in the suit Goldman settled. The bank didn’t admit wrongdoing as part of the accord.

Stephen Cohen, a spokesman for Goldman Sachs, declined to comment on the Delaware ruling.

Last month, a New York judge threw out another pension fund’s suit that challenged Goldman Sachs’s compensation plan for providing millions of dollars in bonuses to executives.

New York State Supreme Court Justice Bernard J. Fried dismissed suits filed by the Security Police & Fire Professionals of America Retirement Fund and investor Judith A. Miller on Sept. 21, according to court dockets.

The Delaware case is In re the Goldman Sachs Group Inc. Shareholder Litigation, CA5215, Delaware Chancery Court (Wilmington).

--With assistance from Chris Dolmetsch in New York. Editors: Stephen Farr, Glenn Holdcraft

To contact the reporters on this story: Jef Feeley in Wilmington, Delaware, at jfeeley@bloomberg.net; Phil Milford in Wilmington, Delaware, at pmilford@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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