On Thursday, Goldman Sachs Group Inc. (GS) was sued by the Central Laborers’ Pension Fund in Illinois, who had bought some Goldman stock in Jan, 2009. As an active investor the pension fund charged Goldman of distributing $22 billion to its employees as bonus payments for fiscal year 2009.
According to the pension fund, the excess bonus payments that amount to nearly 50% of the net revenue of the company are feared to be detrimental for Goldman investors. Such high payouts, especially in the current sluggish economic scenario, are being condemned by the plaintiffs. The charge also states that Goldman had kept aside $17 billion by Sept 2009 for bonus payments, expecting to further this to about $22 billion for 2009.
Additionally, the pension fund also alleged that Goldman had artificially increased its revenues with the $10 billion aid provided by the government’s bailout program and the $13 billion input by insurer American International Group Inc. (AIG) and also by changing the company’s fiscal year. In Apr 2009, the Board of Goldman approved a change in the firm’s fiscal year end from the last Friday of December to December 31, beginning with fiscal 2009. Fiscal 2009 thus began on December 27, 2008, and will end on December 31, 2009.
The pension fund is seeking funds for damages sustained by shareholders, compensation from executive officer defendants and corporate governance changes, among other remedies.
However, Goldman has dismissed the allegation made by the pension fund on the grounds that it has already repaid the $10 billion bailout money to the government in Jun 2009 thereby liberating itself from any pay restrictions. Hence, Goldman counter-attacked the plaintiff, upholding its independence to take any decision. Moreover, leading firms like Goldman, which ranks only next to the world leader Morgan Stanley (MS), shall not follow any such policy that affects investors’ interests.
Goldman is facing various other litigations on the bonus payment issue, while also being criticized from all corners of the industry. In Dec 2009, the International Brotherhood of Teamsters had accused Goldman of trading in derivatives that would benefit from a bankruptcy by a trucking company, YRC Worldwide Inc. (YRCW). Such issues are expected to rise again and affect the overall financial services industry when the companies release their proxy statements and hold annual meetings in the upcoming months.
Goldman is poised to grow significantly with its well-diversified business model and a more favorable operating environment. In all, we think Goldman’s sturdy capital and liquidity will lead to an increased profitability from newer opportunities once the economy recovers. However, concerns have been raised over the company’s financials that can be adversely affected by the current critical sustainability factor and litigation issues. Moreover, if the plaintiffs win the trial, then Goldman might have to heavily compensate ─ both monetarily and otherwise ─ to restore investor confidence.
Read the full analyst report on “GS”
Read the full analyst report on “AIG”
Read the full analyst report on “MS”
Read the full analyst report on “YRCW”
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