Class Action Lawsuit Against Goldman Over ABACUS CDO Signals Time Is Right For Investor Lawsuits

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The legal news is not good if you are a lender or investment bank who participated in the creation of mortgage-backed securities (“MBS”) and other derivatives over the last few years.  But for investors who lost their shirts through their investments in these derivative products, the chinks appearing in the armor of the nation’s largest banks signal the time is right for aggressive legal action.

In the wake of the charges brought against Goldman Sachs last week by the SEC, Goldman already faces several lawsuits related to the ABACUS 2007-AC1 collateralized debt obligation (CDO) from investors and shareholders.  On Monday of this week, plaintiff Howard Sorkin filed a class action lawsuit (complaint available here) on behalf of all investors in Goldman Sachs common stock for losses stemming from the SEC’s action against the bank.  The suit was filed in the United States District Court for the Southern District of New York and alleges that Goldman knew of the impending SEC investigation as early as July 2009 (having received a “Wells Notice”), but concealed these facts from its investors.

A Wall Street Journal article indicates a similar class action lawsuit was also filed against Goldman this week by a shareholder named Ilene Richman.

Bloomberg reports that Goldman is also facing two derivative lawsuits related to Goldman’s involvement in the creation of subprime mortgage CDOs, with Goldman shareholders claiming that its top executives failed to provide sufficient oversight with respect to the deals.  In derivative actions, the shareholders make a demand upon the company’s board of directors to take action against its executives, and may only bring a lawsuit if the board refuses or is conflicted.  Though these actions against Goldman pertain to their participation in the creation of CDOs in general, facts regarding the SEC’s charges stemming from ABACUS 2007-AC1 should certainly figure prominently in the cases.

Bloomberg also notes that a class action is already pending against Goldman Sachs in federal court in New York.  The action, filed by Public Employees’ Retirement System of Mississippi against Goldman Sachs, Moody’s, Fitch and others (Second Amended Complaint available here), alleges that Goldman misrepresented that certain mortgage-backed securities it sold with high ratings were not of the same quality as other investments with the same ratings. This action has been pending in the United States District Court for the Southern District of New York since July 2009.

This flood of litigation against Goldman comes on the heels of a $600 million settlement entered into by Countrywide in a federal class action lawsuit brought by a group of New York retirement funds.  The deal still requires the approval of several pension boards who are plaintiffs in the case and the judge presiding over the case, but if accepted, it would be the largest settlement to arise out of the wave of subprime securities class actions filed in 2008 (and the 13th largest securities fraud class action settlement in history according to the RiskMetrics’ Group list). This result comes after Countrywide settled a lawsuit with dozens of Attorneys General for well over $8 billion in agreed-upon loan modifications (though readers familiar with this blog will remember that, pending the outcome of an investor lawsuit challenging the settlement, Countrywide stands to bear only a fraction of that cost, as it no longer owns most of the loans at issue).

All this leads me to believe that the time is right for investors with the temerity to take on the major Wall St. banks to file lawsuits to recover their losses stemming from subprime and Alt-A mortgage investment vehicles.  The evidence is overwhelming that lenders misrepresented their quality control standards and guidelines (or did not follow them at all), and thus are on the hook in most cases to buy back deficient loans or replace them with performing mortgages.  Moreover, the recent investigations into the role of investment banks in sponsoring and setting up these deals will provide an additional avenue for attack.  If investment banks knew that they were putting together a “sh***y deal,” as Goldman exec Daniel Sparks characterized a Goldman-sponsored CDO in an email produced to Congress this week, this would open the door to all kinds of claims, from Securities Act and Blue Sky statutory violations to common law contract and misrepresentation claims.

It is facts like these–showing that top bank executives knew the deals they were putting together were doomed to fail–that will turn the tide in investors’ favor.  Though banks have had some success in fending off mortgage crisis litigation thus far by using the “global financial catastrophe” defense, the argument that nobody saw this coming will carry much less water now that it is becoming clear that many–including top bank executives–saw the writing on the wall (read Michael Lewis’ new book, The Big Short, to dispel any notion that this crisis came as a total surprise).  Indeed, in suits filed pursuant to the 1933 Securities Act (even those brought before the SEC action against Goldman hit the news), investors are seeing more success than the mainstream media lets on, according to leading subprime litigation commentator, Kevin LaCroix.

So, for those investors who were waiting for the political and regulatory climate to turn before taking action, here is your wake up call.  With more and more evidence emerging that mortgage origination standards plummeted between 2005 and 2007–and that the investment banks condoned and profited from this irresponsible lending–there has never been a better time to become a mortgage crisis plaintiff.

This entry was posted in abacus, Countrywide, derivative lawsuits, Goldman Sachs, investors, litigation, MBS, SEC, securities, securities fraud, shareholder lawsuits. Bookmark the permalink.
  • HP

    >I understand investors are able to proceed with lawsuits. Though, I do not agree since investing carries risk and they all understand there is a risk. My concern is with the individual that lost his home. He may have not been able to qualify for a mortgage but the banks gave it to him anyhow. The banks got away from the standarts of lending practice and misled them into a home they could not afford. Most of the population is not aware of the standarts of lending and the formulas for qualifying for a loan. Who is at fault. If it is the banker that approved or later sold and packaged the loan, should the class action include every lost home?I think the class action should include every lost home. The banker deviated from the norm to make money. The street shold not be the one paying. Open the lawsuit. It will be the biggest one in history.

  • Isaac Gradman

    >Certainly, you are correct that investing carries risk. However, the way that investors determine whether the investment carries an acceptable level of risk compared to the expected return is by evaluating the prospectus for the deal and the governing contracts. Investors should be able to rely on the representations made in those documents regarding the contents of the deal and the manner in which it was put together. If there were material misrepresentations or omissions in those documents, investors have a viable claim that they were misled about the nature and amount of the risk they were taking on.I agree with you that borrowers who were misled into homes they could not afford may have viable claims against the originators or brokers connected with their loans. However, many borrowers were complicit in the irresponsible lending practices of the last five years. If a borrower lied about his or her income to qualify for a loan, and now can't make the payments, the home should be sold to somebody who can pay the mortgage and the borrower has nobody to blame but him or herself. I would also agree that any class action against a bank for improper origination or securitization practices should include every loan impacted by those practices. The makeup of the class will be determined by whether the claimants have common issues of law and fact that would benefit from joint resolution. After that, it's up to the individual claimants regarding whether to participate. Thanks for your comments,IMG

  • Anonymous

    >It is my view that the financial crisis and recession which still plagues us was not a part of the regular business cycle, but rather was caused by the irresponsible and knowingly negligent actions of the investment banks and others. It seems to me that anyone who has been negatively affected by the "Great Recession" could possibly have standing in a class action suit. My wife and I were perfectly able to afford our mortgage payments and other obligations until our income was decreased by about two thirds due to the recession. Now we're doing a little better, but our credit is trashed and we're just barely hanging on. I have the feeling that the bankers who came up with the CDO/CDS schemes and continued pushing them even while they knew they were going down are doing just fine, thank you, and the banks which employed them are now making good profits thanks to being rescued by the taxpayers. How can we ordinary Americans, who ended up being victimized by this conduct get justice? What class action suits could be created or could we join?