Judge certifies securities class action against Goldman Sachs

Posted on: February 21st, 2012 by Steve Larson

A federal judge has certified a securities class action lawsuit against Goldman Sachs.  The lawsuit accuses Goldman Sachs of defrauding investors about a 2006 offering of securities backed by risky mortgage loans from a now defunct lender.

U.S. District Judge Harold Baer in Manhattan certified a class action lawsuit by investors by the Public Empl0yees’ Retirement System of Mississippi.

These investors claimed they lost money in the GSAMP Trust 2006-S2, a $698 million offering of certificates backed by second-lien home loans made by New Century Financial Corp., a California subprime mortgage specialist that went bankrupt in 2007.

The February 2nd decision is a setback for Goldman, which sought to force investors to bring their cases individually.

Class certification lets investors pool resources, which can cut costs, and can lead to larger recoveries than if investors are forced to sue individually.

The bank is one of many accused by Congress, regulators and others of having fueled the nation’s housing crisis and 2008 financial crisis in part by having misled investors about the quality of mortgage debt they sold.

Goldman in 2010 agreed to pay $500 million to settle U.S. Securities and Exchange Commission fraud charges over a collateralized debt it sold, Abacus 2007-AC1 CDO.

The Mississippi fund claimed the GSAMP offering documents were false and misleading, saying Goldman’s boilerplate disclosures failed to reveal how New Century had ignored its own underwriting standards and used inflated appraisals.

It blamed Goldman’s poor due diligence for the bank’s failure to find these problems when it bought New Century’s loans and packaged them into securities.

Goldman contended that class action status was inappropriate given the wide range of certificates offered, the differences among the “highly sophisticated institutional investors” that bought the debt, and even that some investors might have had “storm warnings” about New Century’s practices.

Judge Baer rejected the defense, even faulting Goldman’s “creative cutting and pasting” of a 200-page deposition to bolster its claim that the Mississippi fund was on notice of problems.

“In light of my finding that the common issues predominate, it does not seem likely that questions regarding individual investor knowledge, statutes of limitation or any other issue will become unmanageable,” Judge Baer wrote.

A trial is set for October.

The case is Public Employees’ Retirement System of Mississippi v. Goldman Sachs Group Inc. et al, U.S. District Court, Southern District of New York, No. 09-01110.