Goldman escapes 100m claim over bond losses

Goldman Sachs was not liable for a loan that turned sour, despite its own bankers admitting that the borrower’s prospects “did not sound too rosy”, the Court of Appeal said today.
IFE, a Belgian investment fund, sued Goldman for €100 million (£67 million) after losing money in a debt deal arranged by the US investment bank in 2000.
IFE, part owned by France’s Credit Lyonnais, purchased €20 million of bonds issued to finance the $500 million private equity-backed takeover of Finelist, a UK car parts distributor, by the French group Autodis.
The deal turned sour when it emerged that Finelist had fabricated its accounts in the run-up to the takeover and it was placed in receivership in October 2000.

IFE, which lost the bulk of its investment, sued Goldman for negligence, claiming that the bank had failed to pass on crucial information about Finelist after the loan was arranged.
Goldman used information from Finelist’s accounts to prepare marketing materials that were sent to IFE and other potential bond investors. But it was not until after it accepted commitments from IFE and others that Goldman received a report from Arthur Andersen highlighting irregularities in Finelist’s accounts.
The court heard how, after Goldman received the report, a senior banker involved in the loan said in an e-mail to an Arthur Andersen auditor that the situation “does not sound too rosy”.
Despite this, Goldman did not pass on the new information to investors.
IFE, which says it would have pulled out of the deal had this information been made available, claimed that Goldman owed investors a continuing duty of care to keep them updated.
But this morning the Court of Appeal backed an earlier High Court decision that said Goldman did not have a continuing duty to update investors after the original documentation was distributed.
The judges highlighted a three-page disclaimer included in the marketing material that said the bank had not independently verified the figures used and that they would not necessarily be updated.
That was enough, the judges said, to clear Goldman of negligence towards the fund.
In the initial High Court ruling, the judge added that, since the negative auditor’s report that gave rise to the “does not sound too rosy” comment was an update rather than a final version, Goldman could not be certain that the situation had materially changed.
The judge said there was a difference between a situation in which Goldman had concrete knowledge that a deal was likely to turn sour and one where there was only a possibility.
Since there was only the possibility of a significant change and Goldman had clearly stated its position regarding updates in the original disclaimer, the judges threw out the claim.
IFE said it was considering an appeal to the House of Lords.
Goldman Sachs said it was pleased with the judgment which "underscores the importance of the standard terms in loan documents and reflects the understanding of all the professional players in the market."
Tom Custance, a partner at Fox Williams who acted for IFE, said the case had wide ramifications for investment banks.
“The impact of this judgment is that a bank arranging a loan can alone decide what information to put out to the market – and when – regardless of the fact that this information would deter potential participants from proceeding with their investment.
“The fact that the bank has no responsibility to pass on significant new information means that it can avoid being stuck with a poor – or in this case, disastrous – investment.”
Andrew Howell, a litigation partner at Barlow, Lyde & Gilbert, said: "The dismissal of IFE's appeal is good news for banks that arrange and underwrite debt instruments.
It is standard practice for investment banks in Goldman's position to include appropriate waivers and disclaimers in their documents. The judgment makes clear that those waivers work. "
"Had the case gone the other way, it could have given disgruntled investors plenty of scope to sue arrangers when their investments turn sour – a scenario one might see more of with the number of highly leveraged deals in the market at the moment," he added.