545 F.Supp.3d 120
S.D.N.Y.2021Background:
- Lead Plaintiff Sjunde AP-Fonden (AP7) sued Goldman Sachs, CEO Lloyd Blankfein, President/COO Gary Cohn, and President/COO Harvey Schwartz under §10(b), Rule 10b-5 and §20(a) arising from Goldman’s role underwriting three 1MDB bond offerings (2012–2013) that raised $6.5 billion and yielded ~$600 million in fees.
- Goldman employees (not defendants) repeatedly flagged Jho Low and 1MDB as suspicious; Goldman’s Compliance and Legal groups twice rejected Low for private wealth accounts, yet Goldman underwrote three deals (Projects Magnolia, Maximus, Catalyze) with numerous red flags (astronomical fees, no-bid/private placements, IPIC guarantees, vague use of proceeds).
- After criminal investigations and guilty pleas by Goldman personnel (notably Leissner), Plaintiff alleged that post-scandal public statements and omissions by Goldman and senior officers were false or misleading during the class period (Feb 28, 2014–Dec 20, 2018).
- Defendants moved to dismiss the Second Amended Complaint; the court applied Rule 12(b)(6) and the PSLRA heightened pleading standards on falsity, scienter, and loss causation.
- The Court dismissed all claims against Schwartz for failure to plead scienter, but denied dismissal as to Blankfein, Cohn, and Goldman; it also declined to take judicial notice of factual admissions in the DOJ Deferred Prosecution Agreement (DPA), taking notice only of the DPA filing.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Falsity of public statements (controls, fees, Low/1MDB role, Coastal Energy) | Statements and omissions misrepresented Goldman’s controls, knowledge of Low’s involvement, that fees reflected underwriting risk, and that no third-party payments were made | Many statements were puffery or literally accurate; financial statements and SOX certifications were truthful; some statements concerned known public facts | Court: risk-management puffery and certain financial/SOX statements not actionable; several statements/omissions (no evidence of Low’s involvement, denial of third-party payments, claims of no visibility into diversion, statements about fees reflecting risk, Coastal Energy omissions) pleaded with sufficient falsity to survive dismissal |
| Scienter (Blankfein, Cohn, Schwartz, Goldman) | High-level executives approved all three deals, met with Low, ignored internal red flags and warnings (e.g., sidelining of Ryan), benefitted from fees—supporting recklessness/conscious misbehavior | Transaction approvals and business judgment do not alone show fraud; stock repurchases negate motive; Schwartz had no involvement in the deals | Court: scienter adequately pled for Blankfein and Cohn (imputes to Goldman); scienter not pled for Schwartz—claims against him dismissed |
| Loss causation (stock drops after Nov–Dec 2018 disclosures) | Six disclosures in Nov–Dec 2018 partially and/or fully corrected prior misstatements and caused stock declines tied to revelation of concealed facts | Disclosures were incremental or repeated known risks already public; many were non-corrective or merely materialization of known risk | Court: some disclosures (notably the previously undisclosed Blankfein–Low meeting) plausibly corrective; others less so, but loss causation cannot be dismissed at pleading stage—fact issues for trial |
| Section 20(a) control-person liability | Blankfein and Cohn exercised control and were culpable participants in the alleged primary violations | No primary violation adequately pled as to Schwartz or insufficient control participation | Court: §20(a) claims allowed against Blankfein and Cohn; §20(a) claim dismissed as to Schwartz due to lack of primary violation |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (pleading must be plausible, not conclusory)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (plausibility standard for complaints)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (PSLRA scienter: strong inference must be cogent and at least as compelling as nonfraudulent inference)
- ECA & Local 134 IBEW Joint Pension Tr. of Chi. v. J.P. Morgan Chase Co., 553 F.3d 187 (statements of general business principles often non-actionable puffery)
- Novak v. Kasaks, 216 F.3d 300 (PSLRA/Rule 9(b) standards; confidential sources and scienter pleading)
- Rombach v. Chang, 355 F.3d 164 (Rule 9(b) requires specific pleading of misleading statements and why they were misleading)
- Dura Pharms., Inc. v. Broudo, 544 U.S. 336 (loss causation requires causal connection between fraud and loss)
- In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347 (contextual truthfulness and examination of statements taken together)