(The following post originally appeared on ONSecurities, a top Minnesota legal blog founded by Martin Rosenbaum to address securities, governance and compensation issues facing public companies.)
The SEC’s lawsuit against Goldman Sachs for securities fraud has been big news in the past few days. One interesting aspect of that lawsuit has implications for all public companies – should Goldman have disclosed the existence of the SEC investigation before the SEC announced the lawsuit last Friday? Whatever the answer, Goldman’s public disclosure practices are sure to generate a lot of commentary as the case proceeds.
In a Bloomberg story, “Goldman Sachs Said to Have Been Warned of SEC Suit”, Josha Gallu and David Scheer reported that Goldman received the Wells notice in the case in July 2009, and the company issued a lengthy response in September. Goldman did not mention the investigation in any of its public disclosures. Its 2009 Form 10-K filed on March 1, 2010 disclosed only that Goldman had received “requests for information from various governmental agencies and self-regulatory organizations” relating to CDOs and related instruments, and that the company and its affiliates were “cooperating with the requests.”
Given its size, Goldman might have been able to exclude the possible lawsuit from the 10-K – technically, there is a disclosure threshold of ten percent of current assets (see Instruction 2 to Item 103 of Regulation S-K). However, if it considered the possible lawsuit to be material to investors any time after it received the Wells notice, Goldman arguably should have made the disclosure anyway. In a footnoted.org blog post, “On Goldman and disclosure . . .”, Michelle Leder pointed out that, in contrast to Goldman’s silence, several other large financial companies have elected to disclose the existence of Wells notices. Leder asks, “If disclosing a Wells Notice was material enough for these companies, why was it not material enough for Goldman?”
The Goldman situation highlights one of the most difficult disclosure decisions for a public company. A public company arguably is not always required to make a disclosure as soon as an event becomes “material”, but then insiders must be restricted from trading until the information is disclosed. Goldman clearly based its non-disclosure on a conclusion that the information was not material. In a WSJ MarketBeat post, “Goldman Sachs Conference Call: Any Other Wells Notices?”, Matt Phillips reported that Goldman’s in-house counsel stated Tuesday, in Goldman's investor conference call:
Whether there is a wells or not a wells, if we consider it to be material we go ahead and we disclose it; and that is our policy. To get to your question, we do not disclose every wells we get simply because that just not — that wouldn’t make sense. Therefore we just disclose it if we consider it to be material.
Goldman’s advisors are certainly on the hot seat, given that, as Phillips points out, the announcement of the lawsuit “lopped some $12 billion [15 percent] in market capitalization off the stock on Friday”. And Goldman will continue to be under the microscope for some time, given the publicity that’s likely to accompany the Goldman case for months to come.