Firm Seeks Leave to Swing Against Goldman Sachs, Again

After barely meeting the court’s imposed deadline, a New York firm has asked to amend, a third time, a shareholder derivative complaint challenging one of Goldman Sachs’ stock option valuation methods that allegedly resulted in $110 million of excess compensation to former and current executives between 2005 and 2008.

In a case featuring accusations of family favors, a replaced shareholder plaintiff and a finance professor’s expert opinion in the proposed amended complaint, the procedural history is as lengthy as its survival is questionable.

Manhattan Supreme Court Justice Jeffrey Oing dismissed the case, Michael Korsinsky v. Jon Winkelreid, 650157/2009, in December 2013, on the grounds that demand upon the Goldman Sachs’ board had not been excused in order to properly allege a derivative complaint against a corporation.

However, he did so with prejudice, giving the plaintiff a chance to ask to re-plead claims, since, as the judge informed the parties, “rarely” does he dismiss cases with prejudice.

“I cannot stop someone from bringing motions or litigating cases. That is what we are here for,” Oing said, according to a transcript of the December 20 oral arguments at a motion to dismiss hearing. He added that if he denies Korsinsky’s motion for leave to amend, however, “that in itself ends the case.”

He gave the plaintiff until February 28 to file its motion. The motion for leave to amend is dated Feb. 28 and was e-filed March 1.

The plaintiff Michael Korsinsky, an attorney, is represented by Levi & Korsinsky, where his brother is partner Eduard Korsinsky.

The case alleges breach of fiduciary duties, waste of corporate assets and unjust enrichment arising from Goldman Sachs’ past reliance on a type of stock option valuation methodology called “Divide-by-Four” that deviates from the more industry-standard Black-Scholes technique.

This resulted in Goldman Sachs’ current and former directors, including former co-president Jon Winkelreid and current CEO and chairman Lloyd Blankfein, receiving fat bonuses measured in stock options in excess of between $110 million to $116 million, according to the complaint.

According to Linda Allen, a professor of finance at Baruch College Zicklin School of Business whose opinion was attached as an exhibit, this divide-by-four methodology was “neither a sound nor a reliable option valuation technique” and “inconsistent with basic principles of modern finance,” resulting in dilution of Goldman’s stock and reduced payouts to shareholders.

While the third proposed amended complaint does not “raise anything particularly new factually,” plaintiff’s counsel Nicholas Porritt told CLI, Allen’s expert analysis is newly included.

“The underlying facts and conduct are still basically the same,” Porritt said. “We hadn’t fully made clear to the court that the valuation practices here were unreasonable. We thought it made sense to have a very qualified expert on methodology write an opinion.”

Whether that makes a difference remains to be seen. Oing stated at the December hearing that he was not convinced by allegations that this particular method “was somehow improper or illegal,” pointing out it was disclosed in proxy statements to shareholders and protected by the Business Judgment Rule.

In either event, Oing told the parties, “The problem is there has never been an opportunity to assess any demand futility. That never has been litigated.”

Goldman Sachs, via its counsel Sullivan & Cromwell, has voiced strong objection to the lawsuit, pointing out that neither Korsinsky nor Jeffrey Bader, the original shareholder plaintiff, exercised a proper demand on the board to investigate the action against the company, as required under Delaware law. Goldman Sachs, being incorporated in Delaware, is subject to this so-called Aronson test.

In his motion to dismiss the second amended complaint, defense counsel Robert Giuffra, a partner at Sullivan & Cromwell, argued that it was ripe for dismissal on grounds that “the Korsinsky Firm put forward Michael Korsinsky at the last-minute to serve as lead plaintiff when no other shareholder stepped forward.”

“In sum, this case is a textbook example of an improper shareholder derivative action,” the brief stated, asserting that it “has everything to do with trying to secure a fee for Korsinsky’s brother, and nothing to do with protecting Goldman Sachs’ interests.”

On its website, Levi & Korsinsky describes itself as “a national law firm that represents the rights of shareholders and victims of corporate abuse.”

During December’s oral arguments, Oing expressed consternation with the length of litigation. A parallel federal action, Bader v. Goldman Sachs, 455 2011 WESTLAW 6318037, had been brought in the Eastern District of New York seeking injunctive relief relating to a shareholder meeting, which the district judge dismissed, only to be reversed on appeal by the Second Circuit. Levi & Korsinsky later voluntarily dismissed that action on remand.

“Don’t you think all this litigation that is being thrown at Goldman Sachs has been somewhat of a wearing down of a company in terms of all the shareholders…litigating this?” Oing asked the parties then.

“And, at some point, far be it from me to say to someone you cannot sue somebody, but after a while you got to think about, who is this benefitting at the end of the day?” he continued. “It is about the money. It is all about the money.”

Porritt replied that his client was not challenging “the overall level of compensation” by Goldman Sachs’ directors and officers, but the fact “they got even more money.”

“It is about the money. It walks like a duck, it sounds like a duck, it is a duck,” Oing responded. “It is about the money.”

Goldman Sach’s opposition brief to the plaintiff’s motion for leave to amend is due by May 29, with Korsinky’s reply brief due by July 28.

Through a spokesman, Goldman Sachs declined to comment.

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