State of Financial world !

This is an academic paper I submitted recently, but thought it might give an insight to some of us about how our investment funds are managed. It could apply to your 401K or for that matter any fund you are invested in.

Goldman Sachs (GS):
In the following write up, an attempt to analyze the actions of Goldman Sachs and a brief description of section 17(a), Section 10-b , rule 10-b(5) and section 20(a) of
Securities and Exchange Act of 1934 will be presented

AGENCY RELATIONSHIPS:
As an investment firm, GS underwrites and creates derivatives that are investment grade for its clients. Acting as an agency, GS should act in the best interests of its clients. However, GS omitted or misstated important information regarding the synthetic Credit default obligations (CDO) it created. Though independent third party agents create some of its products, such information regarding the products should be made available to the investors/clients. In this particular case, Paulson &
Co Inc. had a role in creating the CDO that is tied to sub-prime mortgages. While the product was marketed to GS’s clients, Paulson & Co Inc. was actively taking adverse position to the derivative, by betting against it. This leads us to believe that Paulson
& Co. created this CDO with intentions for the CDO to fail. Facts in the case also prove that the CDO was created from lowly rated securities. By promoting the CDO and also supporting the actions of hedge fund firm, GS is in breach of its fiduciary duty. Goldman’s failure to include such information while marketing the product to its principal is a violation of its “Duty of Loyalty”.

FIDUCIARIES: In an Agency – Principal relationship, the agent, when acting on behalf of its principal, has to bind to loyalty, obedience and care as the fiduciary duty. If in case GS intentionally omitted the information from the marketing pitch, then it violates the “duty of Loyalty”, while on the other hand, if it was due negligence or recklessness, then it would have violated “duty of care”. As in the case, EBC I. Inc V Goldman, Sachs & Co., where the client had the reason to trust that Goldman will act in eToy’s interest since they were sharing the profit; in this case, investor has the reason to trust GS as they are collecting commission for managing these funds. Based on these factual allegations regarding the ABACUS issue, the plaintiffs in the two suits allege a "Caremark" claim. In case of eToys, the court ruled against GS motion to dismiss the case for breach of fiduciary duty (Court of Appeals of New York 83 N.E.2D 26, N.Y. 2005).

The following excerpt is taken from a certain lawsuit filed in the state of New York against GS directors.
“147. The Defendants owed and owe Goldman fiduciary obligations. By reason of their fiduciary relationships, the Defendants owed and owe Goldman the highest obligation of loyalty to act in good faith.
148. Defendants violated and breached their fiduciary duties of loyalty, reasonable inquiry, oversight, good faith and supervision. ” (Securities and Exchange Commission)

FULL DISCLOSURE LAWS AND IMPLICATIONS FOR GS & Co:
As a part of the lawsuit, SEC noted that GS & Co misled the investors by representing that ACA selected the portfolio with out disclosing Paulson’s involvement in creating this security. There were two claims made against GS& Co, first of which is violation of Section 17(a) and second being violation of section 10-b and rule 10-b(5).

Section 17(a) from exchange act of 1934, requires that every registered broker-dealer should annually file a “certified” balance sheet and income statement with the SEC and the same should be released to its customers. Neither of which was done by GS & Co. according to SEC’s Claim.

Section 10-b and rule 10-b(5) of the exchange act from 1934: Section 10-b is the antifraud provision of the securities act; while rule 10-b(5) explicitly prohibits any
“(a) employed devices, schemes or artifices to defraud; (b) made untrue statements of material facts or omissions of material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or (c) engaged in transactions, practices or courses of business which operated or would operate as a fraud or deceit upon persons. “

In this context, GS & Co. knowingly and recklessly misrepresented the facts, thus luring the investors into thinking that the value of security was higher than it really is. In both the claims GS was at fault, thus becoming the target of lawsuit ABACUS
2007-AC1 filed by Securities and Exchange Commission.

On July 15, 2010, GS settled the ABACUS 2007-AC1 for $550 Million of which $300M were in fines to the SEC and the remaining $250M were for compensating the investors.

DIRECTORS AND SHAREHOLDERS:
On April 16, 2010, it was revealed that SEC filed a civil lawsuit with claims against
Goldman Sachs for violating federal securities laws seeking injunctive relief, disgorgement of profits, prejudgment interest, civil penalties and other appropriate and necessary equitable relief in relation to ABACUS 2007-AC1 (Edgar).

Per the Securities Exchange Act of 1934, Goldman Sachs should have disclosed the lawsuit and about the investigation to the shareholders as it has an impact on its true financial condition, business and prospects. SEC issued a wells notice to Goldman Sachs in the fall of 2009 in relation to ABACUS deal. A "Wells Notice" is a letter sent by a securities regulator to a prospective respondent, notifying him of the substance of charges that the regulator intends to bring against the respondent, and affording the respondent with the opportunity to submit a written statement to the ultimate decision maker (Astarita).

With Goldman Sachs not issuing an 8-K disclosing the information to the shareholders and then later omitting the same from 10-Q, both of which were signed by Blankfien and Viniar, shareholders decided to file a shareholder derivative suit against the directors for breaches of duty of care and Duty of Candor. This later became a class-action lawsuit with more shareholders joining. The lawsuit also names Goldman Chief Executive Lloyd C. Blankfein as well as its CFO David Viniar and its president and COO Gary D. Cohn (O'CONNELL). The current class action demands removal of the current directors. Based on the section 20(a) of securities Act of 1934, the individual defendants acted as controlling persons of Goldman Sachs and had the power and authority to act unlawful manner. Hence they are liable for the misdeeds. GS & Co to act unlawfully In Malone V. Brincat (722 A 2d 5, del. 1998), Delaware court held directors accountable for the fiduciary duties of care, loyalty and good faith when disseminating any information to the shareholders. The same ruling could be applied here and the shareholder derivative suit against the directors can be upheld for falsifying the information. Though there is no verdict on this case yet, the shareholders might have a case, if not for the “power” and connections these directors at Goldman Sachs possess.

Bibliography:
Astarita, M. J. (n.d.). Retrieved from http://topics.law.cornell.edu/wex/wells_notice
Edgar. (n.d.). Retrieved from
http://www.sec.gov/Archives/edgar/data/886982/000095012310042391/y8417
0exv99w2.htm
O'CONNELL, V. (n.d.). Retrieved from Wall Street Journal:
http://online.wsj.com/article/SB100014240527487034652045752083019552085
96.html#articleTabs%3Darticle
Securities and Exchange Commission. (n.d.). Retrieved from www.sec.gov: 147. The
Defendants owed and owe Goldman fiduciary obligations. By reason of their fiduciary relationships, the Defendants owed and owe Goldman the highest obligation of loyalty to act in good faith. 148. Defendants violated and breached their fiduciary duties of loyalty, reasonable inquiry, oversight, good faith and supervision.

Thank You Come Again!

Dear Mr. Stein,

Here is a retort to your article “My Own Private India“
http://www.time.com/time/magazine/article/0,9171,1999416,00.html


If you believe that your opening statement ,“I am very much in favor of immigration everywhere in the U.S. except Edison, N.J”, will relieve you of your stupidity that is on display in the words that were to follow, I suggest you set better standards for your articles next time around.

There could not have been a fitting name than Edison for that place in NJ considering the fact that Indians are the race that invented number system and geniuses like Edison and Einstein used them for all their inventions. Now that is a hearty tribute!

Why NJ and NY ? Most of the companies out in NJ and NY that are part of the wall street world need employees that have IQ higher than Paris Hilton and yourself. If you know anything about supply and demand from economics, you would realize that demand for such talent is the very reason a huge population of Indians reside there. Oblivious to you, your article might have been edited by an Indian kid for its grammatical mistakes and then published. He might have had a chuckle too.

If I am not wrong, Mr Stein, you are probably proud of your genealogy that is probably 30% german, 20% Irish and the rest from other parts of European Union that gives you the family name “Stein”. Do you think your forefather got yelled at the same way “Go back to Europe”, by the native Americans, when they got off the boats. Illegally ? Now if Immigration is anything like what the brits, french and german did to India or to the aborigines in Australia or for that matter native americans, that should be a matter of concern. As you brilliantly mentioned the fact “so damn poor India”, is a result of those ruthless Europeans that stole all the riches and humiliated the people in my country. You can be in a state of denial by saying “I have a friend who is african american”, but your inert racism is clearly on display. I would be surprised if I am the only one who feels that way.

If anything, you (based on your thinking capabilities) are the minority here. I have come across much better souls that can look beyond skin color and I am glad you don’t represent this country. Kids who are born here, are just as American as you are, no matter how they look in the year book. In this country, they probably bring better value proposition to the table than someone like you.

My word of advice: If you do not end up making it big in California, try setting up a Mac and cheese stand or a tanning Saloon in Edison. However, if you wait for too long, you might want to search for “Naya Jersey” in google for directions to head home.

Brown will never let you down !

What sets you apart ? or should it ?

This memorial day weekend, I met a guy named Shane Wohlken who hiked the Continental Divide trail, A trial that is 3100 miles long spanning from Canada all the way to Mexico via Montana, Wyoming, Colorado, and New Mexico. To my eyes, he looked like a super-hero the moment I learnt about his feat. I got very inquisitive about his hike and bombarded him with a bunch of questions about his experiences. His photo journal from the trip had wonderful pictures of the landscapes that he passed through. Any repetition of his experiences in this write up will only be a mockery of his hike. It's something that should be narrated in his own words and while he is at it, the sense of accomplishment that he expressed and the glittery eyes spoke for themselves.

Just when all of this was happening, a few were interested in the "camera" he used for the hike, others were curious about his "job situation" during the hike, and all he cared about was "The Hike". In my opinion, its not the hike that sets you apart from others (which by default it does), its the courage to take up the challenge and being able to detach from all the worldly things for a while is the point of differentiation. My conversation with him was probably the one time I did not check my godforsaken Iphone for over 30 minutes I wasn't sleeping and many can vouch for that.

When I told some of friends about Shane the next day, all they had to say was, "These guys don't have a life man. They are crazy. They just give up their jobs and end up nowhere in life". Others at the table were readily in congruence. To my surprise they had no appreciation for what Shane accomplished. Interestingly, they tried to bolster just their idea of what life should be like.

In my thoughts though, every person deserves to know, have courage to look within and define what they want. Being successful is not about just getting respect for where you are, but rather what you are as a person. Small adventures and travel help you find just that!

Sometimes, all it takes is a rare encounter that reminds you of what you love and dream about ! I for sure walked away with a reignited passion.