The 2nd U.S. Circuit Court of Appeals in Manhattan has decided that the shareholder lawsuit brought against Goldman Sachs (GS) for its high-risk subprime securities leading up to the 2008 financial crisis cannot move forward as a class action securities fraud case. The court said that a lower court judge had put too much of a burden on the bank by mandating that it prove that the misleading statements and conflicts of interest alleged by the plaintiffs did not affect its stock price. Shareholders, however, are allowed to pursue shareholders class certification again.
The plaintiffs contend that between 2007 and the middle of 2010, they lost over $13B because the Wall Street bank was not forthcoming about being able to deal with certain conflicts. They accused Goldman Sachs of hiding short positions made in a number of subprime mortgage collateralized debt obligations, including the:
- Timberwolf
- Anderson Mezzanine Funding 2007-1
- Abacus 2007 AC-1
- Hudson Mezzanine Funding 2006-1
Investors sued Goldman after the government pursued enforcement actions against the bank and caused its stock price to drop. Goldman settled with the US Securities and Exchange Commission for $550M the allegations that it misled investors regarding its Abacus 2007-AC1, just as the housing market was failing. Goldman did not deny or admit to wrongdoing. However, the bank did acknowledge that its marketing materials for the Abacus did not provide investors with all the information they needed. Specifically, that Paulson & Co., a hedge fund, had been involved in developing the portfolio while taking a short position against the collateralized debt obligation. Meantime, Ex-Goldman bond trader and vice president Fabrice Tourre was later ordered by a judge to pay over $857K in a mortgage deal that failed, leading to $1B in investor losses.
In 2015, U.S. District Judge Paul Crotty certified the plaintiffs’ class action lawsuit finding that the bank had not succeeded in “conclusively” proving that there was no connection between its stock price and its alleged misrepresentations. Now, the 2nd Circuit, pointing to another case, this one involving Barclays Plc, (BARC), has decided in a unanimous decision that Goldman only had to demonstrate, but not “conclusively” prove that its alleged misrepresentations did not hurt the bank’s stock price.
Collateralized Debt Obligations
With this structured financial product, certain kinds of assets, such as loans, bonds, and mortgages, are pooled together and repackaged into tranches that are sold to investors. The demand for CDOs grew dramatically in 2006, with sale prices exceeding $220B. In the wake of the housing market crisis, however, CDO performances soured and they were blamed for hundreds of billions of dollars in losses.
CDO Fraud Lawyers
At The SSEK Partners Group, our securities fraud lawyers believe that filing your own securities claim rather than opting for a class action lawsuit increases your chances for maximizing your recovery. This is not the type of case to pursue on your own and you need a securities law firm that knows how to advocate for you and fight for your right to get your money back. Contact us today to speak with an experienced CDO fraud attorney.
Goldman thwarts fraud class action tied to Abacus CDO: U.S. appeals court, Reuters, January 12, 2018
Arkansas Teachers Retirement System et al v Goldman Sachs Group Inc. (PDF)
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