Goldman's Pesky Fly Could Become a Wasp

Financial institutions are well accustomed to the courtroom. Since banks first started littering our streets, there are people who have felt wronged by them and who have sought restitution. Since the financial crisis, class action suits against the major banks in the United States have gone through the roof -- many times for good reason. But it's hard to take on one of the financial leaders of the world, even if the law firm representing you has eight last names in its title. Now, a recent court decision against Goldman Sachs (NYSE: GS  ) may set precedent for a new wave of suits -- of the clothing and legal kind.

Ya jerks!
It's certainly not hard to make Goldman Sachs look like a bad guy these days. The company has been subject to an enormous amount of scrutiny, from the SEC to the average Joe. It seems everyone wants a piece of the investment bank that received the high school notable "Most Likely to Ruin Your Life."

The company has been adept at handling the salvo of allegations condemning its business practices. There have not been too many major judgments against the company in the wake of the financial crisis. Slightly less evil Bank of America (NYSE: BAC  ) has had harsher consequences in the courtroom. The company has had to pay millions here and there for anything from overcharging its investment-banking clients to negligent corporate behavior. Things could get a bit hairier for Goldman Sachs, though, as a federal appeals court recently revived a 2008 case against the company for misleading customers in regard to its mortgage-backed-securities business.

Specifically, an electrical workers' pension fund enlisted the aid of a major law firm to open a class action suit against the company for what it claims was an attempt to mislead investors about the inherent risk in the home-loan portfolios, many of which were constructed before the housing crash in 2007 and 2008. Goldman was not the only part involved, but it was the leader of the effort backed by Bank of America, JPMorgan Chase (NYSE: JPM  ) , and others.

Realistically, this class action suit is of little consequence in and of itself. The damages, if awarded, would barely move the needle for the $56 billion bank. Standing alone, the case is little more than another fly on Goldman's back. What is troubling, though, is that the revival of the case by a New York Federal Appeals court could pave the way for the thousands of other alleged victims of the mortgage-backed-securities debacle. If one lawsuit goes through, you can be sure law firms will be lining up to represent investors.

Me and 10 million others
What's also interesting is that the three judges have decided to allow the plaintiffs to represent investors not directly involved with their own case. This is very similar to the University of Michigan affirmative action case, where the plaintiff was seeking damages using not only his particular instance, but also that of thousands of other affected parties. The basic question here: Can someone sue over a securities issue when that person didn't purchase the securities in question?

Judges have swayed to either side of the argument in the past. In the University of Michigan case, the plaintiff was allowed to represent others, but in a 2010 case involving Bank of America, the judge required the suit be narrowed to specific securities, a decision that brought the case from more than $300 billion to just over $30 billion in mortgage-backed securities.

As mentioned, Goldman can handle a lot of legal costs -- it's built in to the company's fee structure. What the company and its fellow banks do not need, though, is a line out the door of people seeking restitution for the wrongdoings of pre-financial-crisis-era investment banking. Investors in Goldman, Bank of America, JPMorgan, and others are wise to keep an eye on this developing case.

Understanding the hurdles and opportunities facing a company is crucial in making an investment decision. Check out this premium report in which our analysts lay out the future of Bank of America. It comes with a full year of analyst updates, too, so make sure you claim your copy.

Fool contributor Michael Lewis owns none of the stocks mentioned above. You can follow him on Twitter, @MikeyLewy. The Motley Fool owns shares of JPMorgan Chase and Bank of America. Motley Fool newsletter services have recommended buying shares of Goldman Sachs. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 08, 2012, at 10:19 PM, neamakri wrote:

    Since the federal government decided to bail out these too-big-to-fail banks with (MY) tax money, I only ask one thing: two bankers from every bank that took (MY) bailout money must go to a federal penitentiary for one year. That's all I ask.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2010312, ~/Articles/ArticleHandler.aspx, 10/25/2014 2:24:14 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement