According to Reuters, the federal judge in New York rescinded
the bid filed by
The Goldman Sachs Group Inc.
) regarding the dismissal of a lawsuit charged against the bank,
accusing it of selling risky debts via misleading statements. The
U.S. District Judge, Paul Crotty, has ordered the plaintiffs to
pursue the proceedings over their claims against Goldman relating
to the offering of collateralized debt obligations (CDOs) stating
"Goldman's arguments in this respect are Orwellian".
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CDOs typically repackage bonds and other assets into new
securities. These are not traded on a public exchange, allowing
firms like Goldman to generate fees through brokering deals between
buyers and sellers. However, CDOs have performed miserably since
these were invested in securities comprising sub-prime mortgages,
which are known to have larger-than-average risk of defaulting in
the market. Eventually, the market downturn ruined the investment
banker's expectations, resulting in huge losses for the common
The aforesaid lawsuit has been filed by the shareholders of the
company in Manhattan federal court. They claimed that Goldman
concealed the fact of betting against its clients by taking short
positions in four CDO transactions, which were sold to the
investors. Institutional investors, such as the Arkansas Teacher
Retirement System, the Plumbers and Pipefitters National Pension
Fund and the West Virginia Investment Management Board are also
among the plaintiffs.
All these plaintiffs alleged that Goldman's act of concealing facts
at the time of entering such transactions led to inflated stock
prices. Therefore, investors faced losses when the lawsuits were
filed against Goldman relating to these transactions, which led to
a fall in its share price.
The complaints claimed that Goldman deceptively sold the sub-prime
mortgage-linked securities that gradually failed. In addition to
that, it misrepresented the value of instruments by providing
materially misleading statements.
Among the four transactions involved in the lawsuit, the first one
was the Securities and Exchange Commission's (SEC) charges against
the company accusing it of misleading investors by misrepresenting
facts in its mortgage-backed securities of over $1 billion. The
SEC's complaint accused the investment bank of creating a CDO
called Abacus 2007-AC1, which was made up of mortgage-backed
Goldman was also charged by the SEC in the U.S. for misstating
facts and selling bad quality sub-prime investments to its
customers in 2006, without disclosing the risk factors and the
vital role of Paulson & Co., a prime hedge fund, in the
portfolio selection process. Therefore, Goldman reached a
settlement of $550 million in July 2010 with SEC.
The other three transactions included the Hudson CDO in 2006, the
Anderson CDO in 2007, and Timberwolf I hybrid CDO-squared
transaction in 2007. In all these transactions, Goldman was blamed
for making billions by selling poor quality assets to clients while
short selling those securities.
Moreover, claims against individual defendants, such as the chief
executive officer Lloyd Blankfein; the chief financial officer
David Viniar and chief operating officer Gary Cohn, were also not
dismissed by the federal judge.
The continuously increasing number of lawsuits is sure to dent
Goldman's reputation and its financials. However, investors, who
have lost their hard-earned money in such investments, should feel
Among other banks,
JPMorgan Chase & Co.
HSBC Holdings Plc
M&T Bank Corp.
) have also been legally accused for distorting documents related
to mortgage-backed securities and other losses in 2011.
Goldman currently retains a Zacks #3 Rank, which translates into a
short-term Hold rating. Considering the fundamentals, we also
maintain a long term 'Neutral' recommendation on the stock.