Bamberg v. Goldman, Sachs & Co.
771 F.3d 37
1st Cir.2014Background
- Dragon Systems, a speech-recognition company in financial distress, retained Goldman Sachs as its investment banker in December 1999 to assist with a possible sale; the engagement letter was between Goldman and Dragon (not individual shareholders) and included an exculpatory Annex A limiting liability except for gross negligence, willful misconduct, or bad faith.
- Lernout & Hauspie (L&H) and Visteon both pursued Dragon; Dragon ultimately signed a handwritten March 8, 2000 agreement to be acquired by L&H for $580 million in stock; the deal closed June 7, 2000.
- Goldman prepared a February 29, 2000 memo raising specific due-diligence and accounting concerns about L&H and suggested further accounting-led diligence; Goldman communicated concerns to Dragon management (not to all shareholders) and participated in calls and meetings but did not repeatedly press the issues at the March 27 board meeting.
- L&H was later revealed to have massively overstated revenues; it restated financials, declared bankruptcy, and Dragon shareholders lost the value of their stock. Plaintiffs settled other defendants for over $75 million and then sued Goldman for negligence, negligent and intentional misrepresentation, breach of fiduciary duty, gross negligence, and violations of Mass. Gen. Laws ch. 93A.
- After a 20-day jury trial, the jury found for Goldman on all common-law claims. The district court (bench) also held Goldman did not violate ch. 93A and denied plaintiffs’ motions for reconsideration and new trial. Plaintiffs appealed; the First Circuit affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Legal standard for ch. 93A liability (must conduct be "egregious") | Plaintiffs: ch. 93A does not require "egregious" conduct; a wide range of unfair or deceptive acts should be actionable. | Goldman: caselaw requires a heightened showing (egregious/rascality) for business-to-business negligent conduct to trigger ch. 93A. | Court: Adopted controlling Massachusetts and First Circuit precedent requiring a heightened/"egregious" showing for negligent conduct to violate ch. 93A. |
| Whether Goldman's conduct violated ch. 93A (nondisclosure, due-diligence failures, valuation work) | Plaintiffs: Goldman omitted or downplayed key facts (no analyst coverage of L&H, continuing due-diligence concerns, inadequate analysis of Asian revenues) that induced plaintiffs to approve the deal. | Goldman: raised concerns in February memo, communicated them to primary Dragon contacts, reasonably relied on Dragon’s CFO to lead diligence; conduct, while maybe sloppy, was not egregiously unfair or deceptive. | Court: Affirmed district court — Goldman’s conduct, even if negligent or incomplete, was not "egregious" and thus did not violate ch. 93A. |
| Applicability and timeliness of 940 Mass. Code Regs. § 3.16(2) (post-trial theory) | Roth plaintiffs (post-trial): § 3.16(2) makes failure to disclose material facts a per se ch. 93A violation; applies here because Goldman failed to disclose facts that would have influenced shareholder votes. | Goldman: theory was not raised at trial (waived); § 3.16 is intended for consumer protection and does not apply to business-to-business transactions. | Court: Waiver — Roths raised § 3.16 only after trial and thus forfeited it; on the merits, Knapp plausibly limits § 3.16 to consumer transactions, so it likely does not apply here. |
| Evidentiary rulings and jury instructions concerning Engagement Letter and Annex A | Plaintiffs: Admission of drafting history and Annex A and the court’s instruction about them prejudiced plaintiffs and warranted a new trial. | Goldman: Drafting history and Annex A were relevant to intent and foreseeability of shareholder reliance; jury was correctly instructed that the agreement did not bar plaintiffs’ direct tort claims. | Court: No abuse of discretion in admitting the contract and drafting history; instruction was correct and not confusing; any error as to Annex A was harmless. |
Key Cases Cited
- Mass. Emp'rs Ins. Exch. v. Propac-Mass, Inc., 648 N.E.2d 435 (Mass. 1995) (focus on nature, purpose, and effect of conduct for ch. 93A determinations)
- Marram v. Kobrick Offshore Fund, Ltd., 809 N.E.2d 1017 (Mass. 2004) (negligent misrepresentations give rise to ch. 93A liability only if "extreme or egregious")
- Knapp Shoes Inc. v. Sylvania Shoe Mfg. Corp., 640 N.E.2d 1101 (Mass. 1994) (regulatory provisions interpreted as consumer-oriented; limits certain AG regulations to consumer transactions)
- In re Pharm. Indus. Average Wholesale Price Litig., 582 F.3d 156 (1st Cir. 2009) (First Circuit discussion of ch. 93A standard and appellate review of fairness findings)
- Quaker State Oil Ref. Corp. v. Garrity Oil Co., 884 F.2d 1510 (1st Cir. 1989) (First Circuit on ch. 93A standards and "rascality" formulations)
- Incase Inc. v. Timex Corp., 488 F.3d 46 (1st Cir. 2007) (defining "deceptive" as conduct that could reasonably cause a person to act differently)