Goldman Sachs Wasting Shareholder Money On Huge Bonuses, Fiduciary Duty 'Wholly Abdicated,' According To Two New Lawsuits
Two new lawsuits accuse Goldman Sachs, now the most profitable securities firm in Wall Street history, of wasting shareholder money by paying out huge bonuses to its employees.
Both suits pose an intriguing question: considering the billions in government assistance offered to the financial sector, are the bank's hugely lucrative bonuses actually good for shareholders? Or, better yet, are they truly reflective of performance?
The lawsuits, both filed in Manhattan's New York State Supreme Court, were brought by Illinois' Central Laborers' Pension Fund and Illinois shareholder Ken Brown. Each suit alleges that the bank's much-criticized compensation plan is not structured in the best interest of shareholders. Recently, the Security Police and Fire Professionals of America Retirement Fund filed a similar suit against the company.
The individual defendants, including Goldman Sachs CEO Lloyd Blankfein, COO Gary Cohn and CFO David Viniar, "wholly abdicated their fiduciary duty to ensure a compensation package that did not harm shareholders," according to Brown's lawsuit. At least two recent studies, as we pointed out last month, have suggested that higher CEO pay may actually damage long-term shareholder value.
At issue in both lawsuits is whether or not Goldman Sachs's bonuses -- including those from 2008 and the bonuses it plans to pay out in 2009 -- are artificially inflated by the government's assistance. The bank, which says it has set aside a record $16.7 billion for employee compensation thus far this year, is expected to announce its 2009 bonuses on January 18.
Citing New York Attorney General Andrew Cuomo's July report, Brown's lawsuit states that "Goldman earned $2.3 billion, paid out $4.8 billion in bonuses and received $10 billion in TARP funding." The lawsuit argues that the bank's 2008 bonuses were subsidized with taxpayer money.
Here's more from Brown's lawsuit (hat tip to Courthouse News):
"However, Goldman Sachs's compensation is not based on the net income the company would have earned but for the sale of overvalued CDOs, the TARP bail out and other programs put in place by the U.S. government. In fact, Goldman Sachs has recently admitted to the office of The Special Inspector of the Troubled Asset Relief Program that the company would have sustained billions of losses had AIG not been bailed out."
The changes Goldman Sachs has since made to its compensation plan, Brown's lawsuit argues, are minor.
READ Brown's lawsuit: