Lawsuits "Without Merit"

Theranos

Hero-turned-villain Elizabeth Holmes is once again the talk of the town, with HBO's documentary Out for Blood in Silicon Valley bringing her into our living rooms.  (A feature film, Bad Blood, will be coming soon, starring Jennifer Lawrence.)

Back in 2015, Forbes listed Holmes as one of America's Richest Self-Made Women, with a net worth of $4.5 billion.  Now, Holmes' net worth is closer to zero, and she awaits her day in court -- facing fraud charges -- while Theranos, the $9 or $10 billion company she "built" is now defunct.  (Dollar numbers based on valuations/private fundraisings at its peak.)

1MDB

Meanwhile on the other side of the world former Malaysian Prime Minister Najib's trial has begun.  

Most of the charges laid against him concern the siphoning of monies (billions!) from the state development fund, 1MDB.  Some of those monies are alleged to have found their way back to Najib and his wife.  Much of the rest seems to have been spent, and often wasted, by the energetic and now notorious Jho Low, who bought yachts and houses, bottles of Cristal, jewelry (for models), threw parties and otherwise lived the life of the rich and famous alongside his good friends Jamie Foxx, Leo Di Caprio, Paris Hilton, Pharrell Williams and other celebs.

But some of the 1MDB monies also found their way to Goldman Sachs and its prized individuals. (Goldman would confer honors on those individuals.)  Goldman Sachs partner Tim Leissner has since pleaded guilty to bribery and money laundering.  While Goldman made (an outrageous) ~$600 million out of the 1MDB issuances, Leissner pocketed some $40 million + just for himself.  Good work if you can get it.

Cases Without Merit

Bringing this all together, what's interesting about Elizabeth Holmes and Goldman Sachs is that the allegations made against them are "without merit" -- they assure us.

In May 2016, when Theranos was hit with class action lawsuits, Theranos was quick to explain to the press that: "The lawsuit filed today against Theranos is without merit," she wrote in an email. "The company will vigorously defend itself against these claims."

When Partner Fund Management LP, a hedge fund based in San Francisco, sued Theranos in October 2016 for a "series of lies" and material misstatements, Theranos told the Wall Street Journal that this lawsuit “is without merit and Theranos will fight it vigorously. The company is very appreciative of its strong investor base that understands and continues to support the company’s mission.”

Walgreens also sued.  You can predict this one: Walgreen's lawsuit, too, was "without merit."

Back in 2015, when suspicion was cast on the extraordinary fees being paid to Goldman, and the nature of their conduct warranting these fees, a Goldman Sachs spokesperson was quick to justify them, explaining: "These transactions were individually tailored financing solutions, the fee and commissions for which reflected the underwriting risks assumed by Goldman Sachs on each series of bonds, as well as other prevailing conditions at the time, including spreads of credit benchmarks, hedging costs, and general market conditions."

When the Malaysian authorities filed criminal charges against Goldman, in December 2018, Goldman was quick to dismiss them, reassuring its shareholders. “We believe these charges are misdirected and we will vigorously defend them and look forward to the opportunity to present our case. The firm continues to cooperate with all authorities investigating these matters," the bank said in a statement.

Other Lawsuits Without Merit

Some cases, of course, have no merit.  Others have merit. 

But the question we ask is what confidence shareholders can draw from prepared, public statements made by companies that the lawsuits against them have no merit?  If companies roll out a standard defense, reassuring shareholders that no major liability lies before them, can shareholders be assured that this is a truthful statement, as opposed to simply a negotiating technique?

Holmes and Goldman might well successfully defend the actions against them.  Who knows - stranger things have happened.  (The Theranos and 1MDB sagas, themselves, are pretty out-there as occurrences go!)

But whether they win or not, Theranos is done and dusted: it has been shut down.  Goldman, meanwhile, has suffered significant fallout in its Malaysian operations: Goldman is struggling to get any share deals done, and has reportedly dropped to 18th in the local M&A deal rankings. And Mubadala, the Abu Dhabi state investment fund, has reportedly ceased doing any new business with Goldman. 

We pulled together an enlightening list of some (handsome) settlements entered into by financial institutions in the near aftermath of dismissing cases against them as being meritless -- and having promised to vigorously defend them -- only to settle for large amounts, sometimes soon thereafter. (emphasis added)