Sehat Sutardja and Weili Dai are suing Goldman Sachs for having forced them into selling their shares in Marvell Technology, the company they co-founded. The forced sale came through a margin call after Nvidia shares plunged during the height of the financial crisis.
“Goldman forced its clients to unnecessarily liquidate their holdings through forced margin calls, only to repurchase these same shareholdings for accounts owned by Goldman and its related hedge funds, some currently under investigation by the federal government,” alleges the complaint filed Monday by Dai and Sutardja in California Superior Court.
Sutardja and Dai are married. They co-founded Marvell in 1995 with Sutardja’s older brother Pantas. Goldman took the firm public in 2000. Sutardja is Marvell’s president, CEO and chairman while Dai has headed up the firm’s sales and marketing.
The complaint alleges that the plaintiffs told Goldman they were conservative investors and made it clear that they did not want to sell their Marvell holdings, worried their selling would send a negative signal to investors in the company. As a result, they decided to use their holdings in Marvell as collateral to buy other stocks.
At Goldman’s suggestion Dai and Sutardja bought shares in specialty chipmaker Nvidia in 2008. Soon after that Nvidia shares plunged. Goldman exercised its rights under the margin contract and quickly moved to liquidate much of the couple’s Marvell shares over their objections. They asked for time in which to sell other less liquid assets and secure other collateral from family members willing to provide them. However, Goldman is allged to have pushed the sale of Marvell stock by falsely telling them that the “S.E.C. Five Dollar Rule” required Goldman to liquidate Marvell shares immediately.
The rule was falsely invoked because for a few days during the financial crisis Marvell shares had traded below $5. However, no such SEC rule existed, the complaint alleges, though many firms do not allow stocks valued at less than $5 to be held a collateral for a margin account.
The couple was eventually forced to sell 8.6 million shares of their Marvell holdings at $6.40, reducing their stake to 65.2 million shares from 73.8 million shares, lowering their stake to 10.6%. As of April 11 Marvell shares were trading at $16.05. The complaint alleges that the value of the shares that were sold is now $138 million, resulting in losses of about $80 million.
Goldman declined comment on the suit. Sutardja and Dai face major obstacles to a successful suit, including an arbitration clause that precludes filing suit in the first place. However, the plaintiffs are arguing that California law allows them to disregard the clause in their margin contract and file suit in court. The other major obstacle is the right that such contract expressly give firms like Goldman to act quickly to liquidate assets in the event of a margin call.
Sutardja and Dai were investigated by the SEC in 2006 for backdating their Marvell stock options. Marvell paid $10 million in 2008 to settle those charges. Dai paid another $500,000 personally to settle allegations that she signed false meeting minutes to cover the backdating of the options. The agreement barred her from serving as an officer or director for five years. Prior to that she had been the firm’s chief operating officer.
Sutardja and Dai met while both were engineering students at UC Berkeley in the 1980s. Sutardja is originally an Indonesian of Chinese descent. Dai had immigrated from China.
