False claims of ethicality can lead to legal liability

Many years ago, I heard the great federal judge J. Skelly Wright tell this wonderful story.  He was presiding over a trial in Louisiana and asked one of the attorneys why the attorney referred to all the witnesses as “Colonel,” to which the attorney responded:  That don’t mean anything – it’s like when I call you Your Honor.

More recently, another federal judge was asked to decide whether an investment bank could in effect say the same thing to shareholders who claimed that they were defrauded by the bank’s representations that it operated in an ethical way.  But this time the court was not amused.

The  lawsuit was brought by shareholders of Goldman Sachs who alleged that they bought the company’s stock at a price that was inflated.  The suit was based in part upon the claim that the firm had falsely represented that “it complies with the letter and spirit of the law, values its reputation, and is able to address ‘potential’ conflicts of interest,” when it was really involved in serious conflicts, including one that led to a $550 million settlement with the Securities and Exchange Commission, causing the stock price to fall.

The company defended against the suit by contending that its professions of being law abiding and ethical were “mere puffery and statements of opinion.”

However, in a decision handed down on June 21, the judge soundly rejected these contentions as “Orwellian,” noting:  “If Goldman’s claim of ‘honesty’ and ‘integrity’ are simply puffery, the world of finance may be in more trouble than we recognize.”  The court also stated:  “Given Goldman’s fraudulent acts [as alleged by shareholders], it could not have genuinely believed that its statements about complying with the letter and spirit of the law — and that its continued success depends upon it, valuing its reputation, and its ability to address ‘potential’ conflict of interests — were accurate and complete.”

In so ruling, the court relied on the holding of another, somewhat similar, case from 2006 brought against…. you guessed it – Goldman Sachs (Lapin v Goldman Sachs Grp, Inc., 506 F. Supp 2d 221 (SDNY 2006)) concerning the firm’s alleged failure to disclose conflicts of interest in its research business.

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