Poor Goldman Sachs -- they just can't win for losing these days.  If they announce profits, they are reviled in the court of public opinion.  They even try to build some affordable housing.  Then, they try to appease the "we hate finance" crowd by doing away with cash bonuses for the top 30 executives at Goldman and instituting shareholder advisory "say on pay," but they still get hit with a shareholder derivative lawsuit over their existing compensation system, which is still due to pay out $22 billion in 2009 bonuses.  Here is the press release from the law firm that filed the suit on behalf of the retirement fund institutional investor.  More importantly, here is the complaint.

The complaint attacks the Board of Directors for annually implementing the Goldman compensation system, whereby almost 50% of profits each year is paid out in employee bonuses, as breaching fiduciary duties to the shareholders.  Which fiduciary duties?  Hard to say.  First, the complaint alleges that compensation system constitutes "waste," and alleges that "no person acting in good faith" would implement this system.  So, the argument could be that the compensation system is a breach of the duty of care (without using those words, for some reason), and that the directors' lack of good faith evidences this lack of care, or the attorneys may be alleging a breach of the now-disappeared stand-alone duty of good faith.  The second count alleges a breach of the duty of loyalty, which makes sense in an executive compensation suit, but the complaint uses the phrase "robotically, without analysis" to describe the board's approval of the compensation system -- a phrase that to me would be used in a procedural due care claim.  Anyway, it will be interesting to see if any of these arguments get very far.  For those keeping score, out of the 14 board members, 4 were inside directors.

The complaint accuses Goldman of a lot more than it sets out in the rather small allegations section.  It comes pretty close to saying Goldman made false statements during the fall/winter of 2008 about TARP, AIG and its own financial health, but it bases no allegations on this.  The complaint also wants to characterize the compensation plan as bad because Goldman's 2009 profits would not have been possible without the infusion of taxpayer TARP money, which Goldman repaid, and also $13 billion which the federal government pressured AIG to pay to Goldman pursuant to credit default swaps that Goldman had purchased from AIG, which were due.  However, AIG was insolvent at that time, and the Treasury Department had AIG pay Goldman and other banks 100 cents on the dollar for those claims, using taxpayer money.  The complaint finds this fishy, and thinks that $13 billion should be repaid to the federal government instead of used for bonuses.  This point doesn't quite make it into the allegations -- hard to find a fiduciary duty to the shareholders to not negotiate well as a secured creditor.  Would the shareholders have preferred 5 cents on the dollar?  AIG shareholders might have a problem with this, or taxpayers generally, but Goldman shareholders should have no complaint unless they think Goldman broke a law.

As John Carney said last month:

There's really not much Goldman can do about this situation. Paying the money to shareholders would only reward the shareholders for demanding the firm take on additional risk. There's really no good solution to the moral and economic problems of an investment bank propped up by an implicit government guarantee. And anyone acquainted with market processes shouldn't be surprised by this: intervention distorts markets, creating insoluable moral and economic problems.

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