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Goldman Sachs Fails to Get Investors' CDO Suit Dismissed

Goldman Sachs Group Inc. (GS) failed to win the dismissal of a lawsuit brought by shareholders claiming they were harmed by conflicts of interest related to collateralized debt obligation transactions.

The U.S. Securities and Exchange Commission sued Goldman Sachs in April 2010, alleging fraud tied to CDOs that contributed to the worst financial crisis since the Great Depression. Goldman Sachs’s shares dropped about 13 percent after the lawsuit was filed. The firm paid $550 million to settle with the SEC, the largest penalty in the regulator’s history.

U.S. District Judge Paul A. Crotty in Manhattan ruled yesterday that investors can proceed with a lawsuit alleging Goldman Sachs’s stock plummeted because the bank failed to disclose that it had bet against CDOs it sold to customers. Crotty dismissed arguments that Goldman Sachs made material misstatements or omissions regarding its receipt of warnings from the SEC that the company might be sued.

Michael DuVally, a spokesman for New York-based Goldman Sachs, declined to comment on the ruling.

Goldman Sachs created and sold CDOs linked to subprime mortgages in early 2007, as the U.S. housing market faltered, without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against one of the vehicles, known as Abacus, according to an SEC lawsuit.

“Goldman’s allegedly manipulative, deceitful, and fraudulent conduct in hiding Paulson’s role and investment position in Abacus transaction, and in hiding its own investment position in Hudson, Anderson, and Timberwolf I transactions takes plaintiffs’ claim beyond that of mere mismanagement,” Crotty said in his ruling.

The case is In re Goldman Sachs Group Inc. Securities Litigation, 10-3461, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Michael Bathon in Wilmington, Delaware, at mbathon@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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