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Goldman’s $79.5 Million Ripple

Ripple

Foreign Corrupt Practices Act settlement amounts are one obvious consequence of FCPA non-compliance and tend to generate the most headlines.

However, as has been discussed on these pages for years  including in this article “FCPA Ripples”, settlement amounts are only one consequence of the overall financial ramifications of FCPA scrutiny and enforcement.

As highlighted in this prior post, in October 2020 Goldman Sachs resolved a net $1.66 billion DOJ/SEC FCPA enforcement action in connection with its participation in 1MDB (Malaysia’s state-owned and state-controlled investment development company).

As often happens in connection with FCPA scrutiny or enforcement, lawyers representing shareholders filed civil actions including derivative actions alleging that Goldman officers and directors breached fiduciary duties in connection with the underlying conduct.

One such matter was filed by Fulton County Employees’ Retirement System and in a recent memorandum of law in support of its unopposed motion for preliminary approval of a settlement, it stated:

“Plaintiff initiated this Action against numerous current and former directors and officers of Goldman Sachs in connection with a corporate scandal involving the Malaysian sovereign wealth fund 1MDB, for which Goldman affiliates underwrote three bond issuances in 2012 and 2013. Plaintiff is now pleased to report that, following three years of litigation over what has been described as “the most difficult theory of corporate law,” Plaintiff submits that it has secured a highly favorable Settlement that confers two important categories of benefits on the Company.

First, the Settlement obtains a $79.5 million cash recovery for Goldman (the “Monetary Consideration”), which funds are to be used entirely for the Company’s compliance purposes and the implementation of the Settlement’s corporate governance measures. Significantly, the Monetary Consideration represents an outstanding recovery for the Company, as it ranks as the second-largest shareholder derivative settlement ever in the Second Circuit.

Second, the Settlement includes various corporate governance measures that are designed to strengthen the Company’s internal controls and prevent future wrongdoing at the Company. These measures—which were designed by Plaintiff with the assistance of a renowned corporate governance expert, Columbia Law School Professor Jeffrey N. Gordon—include: (i) the extension of the Corporate Compliance Program provisions set forth in Goldman’s Deferred Prosecution Agreement (the “DPA”) with the DOJ, which had been set to expire on October 22, 2023; (ii) enhancements to the authority of the Chief Compliance Officer (“CCO”); (iii) maintenance of an anonymous employee hotline with reporting to the CCO; and (iv) designation of an external party to monitor public media and industry reports that may raise compliance concerns.

All parties to the litigation support the Settlement. Indeed, Plaintiff submits that the Settlement is an excellent result for Goldman Sachs and its current shareholders and avoids highly uncertain, risky, and protracted litigation. It is also the product of extensive, arm’s-length negotiations, including a two-day mediation before two nationally recognized and renowned mediators, the Hon. Daniel Weinstein (Ret.) and Jed D. Melnick, which culminated in a mediator’s proposal to settle the Action on the terms set forth herein. As detailed below, the Settlement is unquestionably fair, reasonable, and adequate, and warrants the Court’s preliminary approval.

[…]

Plaintiff aggressively prosecuted this case on behalf of the Company and developed a deep understanding of the strengths and weaknesses of its claims. Notwithstanding its confidence in the merits of the claims, Plaintiff recognized the challenge of establishing that demand was futile, and if so, that Defendants breached their fiduciary duties by consciously disregarding their oversight responsibilities with respect to Goldman’s involvement in the 1MDB deals. While this Caremark claim is widely considered “the most difficult theory in corporation law upon which a plaintiff may hope to win a judgment,” In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 967 (Del. Ch. 1996), this difficulty was heightened here, as the 1MDB transactions occurred almost a decade ago and predated many of the Individual Defendants’ tenures at Goldman. As a result, Plaintiff not only recognized the risk and uncertainty of establishing liability at trial, but also of successfully establishing demand futility at the pleading stage—a threshold requirement that Defendants vigorously contested.

Given these and other risks inherent in this derivative litigation, Plaintiff submits that the Settlement represents an outstanding result that secures meaningful benefits for Goldman and its shareholders, while avoiding the prospect of no recovery at all.”

According to the Stipulation and Agreement of Settlement filed in the case, Plaintiff counsel intends to apply to the court for an award of fees and expenses not to exceed 25% of the $79.5 million (approximately 19.9 million).

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