Goldman Sachs Denied Dismissal Of Class-Action Lawsuit Over Subprime Mortgages

A Manhattan court denied Goldman Sachs Group’s appeal to dismiss a class-action lawsuit that accuses the investment bank of hiding information when it created subprime securities prior to the Great Recession, according to a report in Reuters.

In a 2-1 decision on Tuesday (April 7), the 2nd U.S. Circuit Court of Appeals said Goldman failed to “overcome a presumption that shareholders relied on its alleged misstatements, including that client interests always come first” and “integrity and honesty are at the heart of our business.”

The class-action lawsuit – the Arkansas Teacher Retirement System v. Goldman Sachs Group – accuses the investment bank of suppressing secret dealings with a notable hedge fund manager as well as other conflicts of interest prior to the 2008 financial crisis. The lawsuit, which was initiated by three pension plans, accuses Goldman of falsely inflating its abilities to handle conflicts. It also states that shareholders lost over $13 billion from February 2007 to June 2010.

The court dismissed Goldman’s assertion that class-action lawsuits based on “general” statements should not be allowed because it could cause securities fraud claims to become “a form of investor insurance” triggering waves of warrantless litigation.

“We are not blind to the widespread understanding that class certification can pressure defendants into settling large claims, meritorious or not, because of the financial risk of going to trial,” Circuit Judge Richard Wesley wrote. “But our law already beats back this parade of horribles.”

The lawsuit sprung from numerous collateralized debt obligations (CDOs), including Abacus 2007 AC-1, which was the core of a U.S. Securities and Exchange Commission (SEC) investigation. Goldman settled in 2010 for $550 million in a civil suit.

Goldman did agree that it was a “mistake” not to reveal the involvement of hedge fund manager John Paulson, who had a hand in selecting some mortgages to include in Abacus and then went on to bet against the CDO through short sales. He made a profit of about $1 billion “at the expense of the CDO investors,” according to the Reuters report.

Ten years after the financial crisis, seven top executives from the biggest banks in the U.S. were grilled on Capitol Hill in April 2019 in front of the U.S. House Committee on Financial Services. Some of the executives who offered testimony sought to paint a picture that lessons have been learned and that things have gotten better, even against the backdrop of slowing economic growth.