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Brautigam v. Blankfein

United States District Court, S.D. New York

March 26, 2014

MICHAEL G. BRAUTIGAM, an individual, Plaintiff,

For Michael G. Brautigam, An individual, Plaintiff: Anthony Frank Maul, Jason Samuel Cowart, Pomerantz LLP, New York, NY; John G. Emerson, Jr., Scott E. Poynter, Emerson Poynter LLP, Houston, TX; Robert A. Jigarjian, PRO HAC VICE, Jigarjian Law Offices, San Anselmo, CA; William T. Crowder, PRO HAC VICE, Emerson Poynter LLP, Little Rock, AR.

For Lloyd C. Blankfein, Gary D. Cohn, Claes Dahlback, Stephen Friedman, William W. George, James A. Johnson, David Viniar, Goldman Sachs Group, Inc., Defendants: Benjamin Robert Walker, Richard Howard Klapper, Robert Joseph Giuffra, Jr., Theodore Edelman, Sullivan & Cromwell, LLP(NYC), New York, NY; David Maxwell Rein, Sullivan & Cromwell LLP, New York, NY.

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HONORABLE PAUL A. CROTTY, United States District Judge.

Plaintiff Michael Brautigam (" Brautigam" ) brings this shareholder derivative action on behalf of The Goldman Sachs Group Inc. (" Goldman" ) to redress injuries

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as a result of alleged breaches of fiduciary duty by the seven individual defendants, Lloyd Blankfein, Gary D. Cohn, David Viniar, Claes Dahlback, Stephen Friedman, William W. George, and James A. Johnson (collectively, the " Individual Defendants" ), all members of Goldman's Board of Directors. Goldman is named as a nominal defendant, solely in its derivative capacity.

The Complaint is a condensed and restated version of the April 13, 2011 report by the U.S. Permanent Subcommittee on Investigations entitled " Wall Street and the Financial Crisis: Analysis of a Financial Collapse." (Compl. ¶ 1.) The Complaint alleges that as the market for subprime residential mortgage backed securities (" RMBS" ) and other mortgage related assets began to decline, exposing Goldman to substantial losses, individuals at Goldman conceived a plan to sell off the mortgage related assets in order to transfer its exposure to unsuspecting clients. This was accomplished by the sale of three collateralized debt obligation (" CDO" ) offerings[1]: Hudson, Anderson, and Timberwolf. Goldman sold the CDOs to its clients while Goldman held the short (here, the profitable) positions. ( See Compl. ¶ ¶ 32, 35-39, 59, 64, 65, 67.)

Plaintiff has not made any demand on Goldman's Board of Directors to institute any action against the seven Individual Defendants pertaining to their alleged conflict of interest and breach of fiduciary duties. He claims that such demand would be futile.

Defendants move to dismiss, arguing: (1) the failure to make demand on the board of directors is not excused and any futility argument is barred by res judicata and collateral estoppel based on In re Goldman Sachs Mortg. Servicing S'holder Derivative Litig., 2012 WL 3293506 (S.D.N.Y. Aug. 14, 2012), and In re Goldman Sachs Grp., Inc. S'holder Litig.,  2011 WL 4826104 (Del. Ch. Oct. 12, 2011); (2) Plaintiff does not adequately allege particularized facts to support the conclusion that Plaintiff's failure to make demand on the board was excused; and (3) Plaintiff fails to state a claim upon which relief can be granted, because the misstatements allegedly made by Defendants are not actionable as a matter of law.

The Court finds that Plaintiff's failure to make prior demand on the Board of Directors is not excused, and therefore grants Defendants' motion to dismiss.


Blankfein, Cohn and Viniar (the " Executive Defendants" ) served as senior executives at Goldman during the relevant period of time. Each of the Executive Defendants was a member of Goldman's management committee.

Dahlback, Friedman, George and Johnson (the " Outside Directors" ) served as directors of Goldman and as members of its Audit and Risk committees during the relevant period of time, but were not Goldman employees. During the time period at issue (2006-2011), members of Goldman's Audit and Risk committees met with senior Goldman personnel to discuss the issues within their areas of expertise.

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(Compl. ¶ ¶ 22-25.) Specifically, the Audit Committee was responsible for assisting the company's Board of Directors in overseeing Goldman's risk management and legal and regulatory compliance. ( Id. at ¶ 135.) The Risk Committee reviewed and discussed, among other topics, Goldman's exposure to mortgage-related investments. ( Id. at ¶ 100.)

In the summer of 2006, Goldman's management recognized that the value of subprime residential mortgage backed securities (" RMBS" ) was beginning to decline, exposing Goldman to significant risks from its holdings of related securities. On August 9, 2006, Viniar and other senior executives were informed that the ABX index, which tracked the performance of RMBS, had " run its course" and that Goldman would begin to " reduce exposures." (Compl. ¶ 32.) On September 20, 2006, Viniar was told that because Goldman had been unable to sell its ABX investments, its mortgage department was working on structuring Hudson Mezzanine 2006-1 (" Hudson" ), the " first ever" ABX collateralized debt obligation, in order to transfer exposure away from Goldman to the security's eventual investors. ( Id. at ¶ ¶ 35-37.) Hudson was a $2 billion collateralized debt obligation comprising $1.2 billion in ABX assets from Goldman's inventory and $800 million in mortgage-related credit default swaps.[3] ( Id. at ¶ 37.) In Hudson's marketing materials, Goldman informed potential investors that its interests would be " aligned" with theirs because it was purchasing equity in Hudson. ( Id. at ¶ 38.) In reality, Goldman would own only $6 million of equity in Hudson, while simultaneously taking a much larger $2 billion " short" position on Hudson, meaning that it would profit if Hudson's underlying assets decreased in value. ( Id.) Goldman also did not inform investors that Hudson's underlying assets were selected from Goldman's own inventory or that they had been priced internally by Goldman without reference to actual third-party sales of the underlying assets. ( Id. at ¶ ¶ 38-39.) On October 25, 2006, Cohn and Viniar were told that more than 85% of Hudson's equity had been sold. ( Id. at ¶ 41.) The next day, Blankfein and Cohn were informed that the reduction of Goldman's exposure to RMBS-related risk was " primarily due to" Hudson's success. ( Id.)

In December, 2006, Viniar met with executives from Goldman's Mortgage Department and instructed them to work towards achieving a neutral risk position, neither long nor short in the mortgage market. ( Id. at ¶ 47.) As he explained, his " basic message was [']lets be aggressive distributing things because there will be very good opportunities as the markets go into what is likely to be even greater distress and [Goldman] want[s] to be in position to take advantage of them.[']" ( Id.) On February 8, 2007, Cohn and Viniar received an update from a subordinate that Goldman's " [t]rading position ha[d] basically squared" and that the Mortgage Department " plan[ned] to play ...

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