By Jonathan Stempel
Fri Jun 22, 2012 2:33pm EDT
(Reuters) - A federal judge's decision that otherwise went against Goldman Sachs Group Inc has made it easier for companies to defeat shareholder claims that litigation threatened by the U.S. Securities and Exchange Commission should be disclosed.
U.S. District Judge Paul Crotty in Manhattan said Goldman could not be sued under federal law for securities fraud for failing to disclose it had received a Wells notice from the SEC, though news of a notice often causes a negative market reaction.
The case related to Goldman's alleged failure to disclose conflicts of interest in its sale of risky collateralized debt obligations such as Abacus 2007 AC-1, which led to a $550 million settlement between the bank and the SEC.
A Wells notice shows that SEC staff intend to recommend civil charges and lets a recipient mount a defense. But it is SEC commissioners themselves who decide whether to bring a case.
"At best, a Wells notice indicates not litigation, but only the desire of the enforcement staff to move forward," Crotty wrote. "When the regulatory investigation matures to the point where litigation is apparent and substantially certain to occur, then ... disclosure is mandated."
Goldman got its Wells notice in July 2009, but that was not revealed until the SEC accused it of fraud the following April. Two employees, Fabrice Tourre and Jonathan Egol, also got Wells notices, and the SEC eventually charged Tourre with fraud.
Peter Henning, a law professor at Wayne State University, said Crotty's decision is the first to conclude that receipt of a Wells notice does not trigger an automatic disclosure obligation, including
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