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Goldman Sachs investors win right to sue as group over CDOs

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Goldman Sachs Group shareholders won a ruling allowing them to proceed as a group in a $13 billion lawsuit claiming the bank defrauded them by failing to disclose conflicts of interest related to investments linked to risky mortgages it sold before the financial crisis.

U.S. District Judge Paul A. Crotty in Manhattan granted the shareholders’ request to certify the case as a class action, dealing a blow to the company’s efforts to avoid further liability for the investments at issue, including the infamous Abacus collateralized debt obligation.

The suit centers around CDOs that Goldman Sachs created and sold in early 2007 as the U.S. housing market began to unravel. The investors, which include the Arkansas Teacher Retirement System, allege that statements made about the securities were false and misleading because the company acted in direct conflict with its clients’ interests.

Abacus was the CDO at the center of a Securities and Exchange Commission case that led to a $550 million settlement in 2010 to resolve claims over the marketing of the investments — the largest penalty ever levied by the SEC against a Wall Street firm.

The SEC had accused former Goldman Sachs vice president Fabrice Tourre of intentionally misleading investors about the role played by Paulson & Co., the hedge fund of billionaire John Paulson, which helped choose the portfolio of securities and made a billion-dollar bet it would fail. A federal jury in Manhattan in August 2014 found Tourre liable for his role in Abacus and ordered him to pay $825,000.

Goldman Sachs spokesman Michael DuVally declined to comment.

The suing investors initially won the right to sue as a group in 2015 before an appeals court reversed the ruling, saying the trial judge needed to consider whether Goldman Sachs had shown that its share price wasn’t impacted by the misrepresentations. On Tuesday, Crotty addressed that issue in an 11-page decision, saying the bank was unable to make such a showing and the case could proceed as a class action.

Bloomberg Intelligence senior litigation analyst Elliott Stein has estimated the bank will eventually settle the case for $65 million to $325 million, based on resolutions of similar class-action securities from 2006 to 2016.

Bloomberg News
CDOs Lawsuits Mortgages Subprime lending Goldman Sachs