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Goldman to Face Another CDO Lawsuit: Will Shares Dip?

Shares of The Goldman Sachs Group, Inc.GS had tumbled 13% when a civil lawsuit related to its mortgage-based collateralized debt obligation securities was filed in Apr 2010. Is the stock likely to see a similar plunge this time around?

A Manhattan federal court, on Thursday, gave approval to a group of investors for pursuing a class action against Goldman. The lawsuit alleges that the company provided misleading and incomplete information related to a CDO named Abacus that was created just at the onset of the housing bubble bursting.

In Apr 2010, the Securities and Exchange Commission ("SEC") accused Goldman for not disclosing the involvement of Paulson & Co., a major hedge fund in the portfolio selection process for Abacus. Notably, Goldman allowed Paulson to select bonds that were most likely to fall; however, the same hedge fund held a short position against the CDO, reflecting Goldman's conflicting interests.

Once the Abacus portfolios declined as they were bound to, European banks and other investors lost more than $1 billion; while Paulson made money from the bets against the mortgage bonds. Companies like ABN Amro and IKB Deutsche Industriebank AG, a German bank, made huge investments in Abacus and incurred severe losses.

While the case eventually led to a $550 million penalty for Goldman in Jul 2010, the alleged fraud is likely to draw more penalties given the possibility of a new class action on part of affected investors. Shares had dipped drastically then, and might react equally this time, if the case is filed.

The global giant is already struggling with various settlements related to pending lawsuits, and renewed troubles like these will worsen its legal burdens. Notably, Goldman raised its reasonably possible legal loss estimates by 55% to $5.9 billion in Jul 2015. Moreover, it had set aside $1.45 billion in the second quarter to cover mortgage-related litigation expenses and regulatory matters.

Goldman currently carries a Zacks Rank #3 (Hold).

Arlington Asset Investment Corp. AI , Cowen Group, Inc. COWN and JMP Group LLC JMP are better-ranked stocks in the same industry. While Arlington sports a Zacks Rank #1 (Strong Buy), both Cowen and JMP Group hold a Zacks Rank #2 (Buy).

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GOLDMAN SACHS (GS): Free Stock Analysis Report

COWEN GROUP INC (COWN): Free Stock Analysis Report

JMP GROUP INC (JMP): Free Stock Analysis Report

ARLINGTON ASSET (AI): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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