Goldman Hit With Galleon Subpoena, Shareholder Suits

May 4 2010 | 4:21am ET

Legal troubles continue to mount for Goldman Sachs in two hedge fund-related cases. The Wall Street giant yesterday revealed that it has been subpoenaed in the Galleon Group insider-trading case, and that it had been hit with six investor lawsuits since the Securities and Exchange Commission accused it of defrauding investors in a collateralized debt obligation it structured for Paulson & Co.

The new legal headaches come on top of the SEC’s lawsuit, filed last month, a criminal investigation into the CDO deal, as well as a raft of probes in Europe. It also emerged last month that a Goldman director, Rajat Gupta, may have passed non-public information about Berkshire Hathaway’s $5 billion investment in the bank to Galleon founder Raj Rajaratnam.

In the Galleon case, the SEC has demanded the trading records and monthly account statements of Michael Kimelman from Goldman and its Goldman Sachs Execution and Clearing division. Kimelman is one of 21 people charged in the insider-trading case.

The subpoena was sought by Kimelman’s attorney and delivered to Goldman on April 15, one day before it was sued by the SEC over the Paulson CDO. Lawyers for Kimelman, formerly of hedge fund Incremental Capital and one of nine Galleon defendants to plead not guilty, want lawyers from Goldman’s legal department to appear in court on May 14.

Potentially more damaging to Goldman are the half-dozen shareholder lawsuits filed against it in the wake of the SEC lawsuit. Those investors accuse Goldman of “breach of fiduciary duty, corporate waste, abuse of control, mismanagement and unjust enrichment,” as well as “challenging the accuracy and completeness of GS Inc.’s disclosure,” the bank said in an unusual SEC filing.

The alleged incompleteness that has left shareholders fuming apparently stems from Goldman’s decision not to inform its investors that it received a Wells Notice about the Paulson CDO last summer, indicating that the SEC was planning to bring an enforcement action against it.

The shareholder suits are seeking damages, restitution and corporate governance reform.

The SEC accuses Goldman of failing to disclose Paulson’s alleged role in selecting the residential mortgage-backed securities that went into the CDO in question, called ABACUS-2007-AC1. The regulator has also rapped Goldman for allegedly failing to disclose that Paulson planned to short the vehicle.

Goldman has denied any wrongdoing in the case.


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