The co-founders of Marvell Technology, Weili Dai and Sehat Sutardja, sued Goldman Sachs in California Superior Court alleging that the firm duped them into selling a large block of company shares, which Goldman then purchased for its own account.  According to the complaint:

"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."

Margin cases are hard to win.  Customers typically sign detailed contracts before they can to borrow on margin, allowing firms like Goldman to act swiftly to liquidate holdings to meet margin calls.  Customers usually have to fight their claims in arbitration, a closed-door process, but in this case lawyers for Ms. Dai and Mr. Sutardja are arguing that California law opens the door for them to bring their grievance to court.  A Goldman spokesman said the firm had not yet seen the complaint.

        The Plaintiffs and Their Relationship with Goldman.   Mr. Sutardja, the President, CEO and Chairman of Marvell, and Ms. Dai, a VP and general manager of communications and consumer business, are married.  The pair was investigated 5 years ago by the SEC on stock option backdating and, in 2008,  Marvell paid a $10 million fine to settle the charges.  Ms. Dai agreed to pay $500K to settle allegations that she picked the dates in hindsight and signed false meeting minutes to cover her actions.  Ms. Dai, once the COO, was barred from serving as a director or an officer for 5 years.

Marvell's relationship with Goldman Sachs began in 2000, when the investment too the company public.   The 2 co-founders turned their personal financial affairs over to Goldman.   According to the complaint, the executives said they told Goldman they were conservative investors and made it clear to Goldman that they didn't want to sell their Marvell holdings - they worried about sending a negative signal to investors.  As a result, they decided to use their holdings in Marvell as collateral to buy other stocks.

In 2008, at Goldman’s suggestion, according to the complaint, Ms. Dai and Mr. Sutardja bought shares in a technology company, Nvidia.  Soon thereafter, Nvidia shares plunged, and Goldman quickly moved to liquidate the pair’s Marvell holdings.  The couple objected and asked that Goldman give them time to sell other, less liquid holdings.  Family members of the couple even offered to put up collateral, according to the complaint. 

Ms. Dai and Mr. Sutardja contend that Goldman used false grounds to push the sale of the Marvell stock, telling them that an SEC rule - the "SEC Five Dollar Rule," required Goldman to liquidate Marvell immediately.  As it turned out, Marvell shares traded below $5 for a few hours on one day during the financial crisis.  While many brokerage firms don't allow stocks valued at less than $5 to be held as margin, there's no SEC rule governing this, according to the complaint.

The couple eventually sold 8.6 million shares when Marvell was trading at $6.40.  On Monday, the stock closed at $16.05.  The sale reduced their Marvell stake to 65.2 million shares, lowering their stake in the company to 10.6%, from 12%. 

Although the complaint says Goldman repurchased the shares for its own accounts and hedge funds, the suit provides no evidence to support this.  

To access a full account of the story, go to:   [Dealbook, 4/11/11, story by Suzanne Craig]