Wall Street banks criticized for new investment firm contracts

Goldman Sachs and Citigroup have instituted contracts for investment firms that require them to go to court rather than arbitration

The big guys on Wall Street are drawing up a controversial contract regarding their relationships with investment firms. The contract is drawing criticism for its double standard, as the big banks — such as Goldman Sachs and Citigroup — seem to be setting up different rules for legal proceedings with different investors. 

The contract requires future legal disputes between the banks and investment firms to go to court instead of arbitration — a stipulation that critics claim is in favor of the banks since they can prolong legal proceedings for extensive amounts of time, and they know that investment firms are less likely to gain favor from juries versus individual investors. Wall Street banks require individual investors to settle in arbitration. Both contracts are seen as being set up purely to favor the banks.

Reuters reports that Joseph Peiffer, a lawyer in New Orleans who represented the city against Goldman Sachs, condemns the contract as a huge disadvantage towards every investor who could battle a major bank, and is considering bringing the case to the Supreme Court. He is quoted: "They force everyone including an 80-year-old widow into arbitration, but when an institution wants to arbitrate with them they fight it tooth and nail.” 

Here lies a perpetual argument between big business and small business: that — at the heart of capitalism — the notion persists that big businesses have earned their right to stay on top through the justice system and their corporate profit. But, many perceive that the justice system is bent to disadvantage the smaller investors, and in doing so, discourages innovation.

Reuters goes on to cite comments by Jeffrey Riffer, a Los Angeles securities lawyer, who claims that individual investors who lose money can grow as compelling stories to juries — particularly in cases that become public. Bad publicity can often be more detrimental than courtroom-based financial damage, depending on how bad the public relations nightmare is. Riffer said that — at least — arbitration proceedings give brokerages “the advantage of a closed-door proceeding.” 

Whether or not such a contract by the bigwigs of Wall Street will become so closely scrutinized it makes its way to the Supreme Court is impossible to tell, but it is for certain that those lawyers working in securities are not keen to let it fly.

 

Further reading:

Judge allows Detroit pension fund class action against Goldman Sachs to proceed

Goldman Sachs will go to court over investor fraud

Ex-Goldman Sachs VP ordered to pay $1.1 million for role in fraud

Contributing Author

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Juliana Kenny

Juliana Kenny is a contributor to InsideCounsel.com, covering a range of topics including patent litigation, conflict mineral laws, executive compensation, and antitrust regulation. Juliana earned B.A.s...

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