Goldman Sachs Sued Over German Bank’s $37 Million Loss on CDO

Landesbank Baden-Wuerttemberg headquarters
The Landesbank Baden-Wuerttemberg (LBBW) headquarters in Stuttgart, Germany. Photographer: Hannelore Foerster/Bloomberg

Goldman Sachs Group Inc., which served as the placement agent for a collateralized debt obligation named Davis Square Funding VI, was sued by Landesbank Baden-Wuerttemberg over its $37 million loss on the investment.

The CDO held 95 percent residential mortgage-backed securities, of which 33 percent were subprime and 46 percent were “midprime,” the German bank said in a complaint filed yesterday in federal court in Manhattan. TCW Group Inc., the investment adviser on the CDO, was also sued by the bank.

When Goldman sold the investments to a Luxembourg affiliate of LBBW in March 2006, they were represented as “safe, secure, and nearly risk free,” according to the complaint. At the same time, Goldman senior executives privately observed that “it was game over” for subprime lenders and were reducing their exposure to the mortgages, LBBW said.

“Goldman knew at the highest levels of its organization that its representations to LBBW Luxemburg that the notes merited triple-A ratings and were high grade were blatantly false,” the Stuttgart-based bank said. “Goldman committed fraud and, or, was negligent in marketing and selling the notes to LBBW Luxemburg.”

Moreover, Goldman was buying credit default swaps in case Davis Square VI and similar CDOs would fail and was also using TCW Group’s parent company, Societe Generale SA, to purchase insurance specifically against Davis Square’s failure, the bank said.

“TCW has acted appropriately in managing Davis Square VI and any allegation to the contrary is without merit,” the company said in an e-mailed statement.

Michael DuVally, a spokesman for New York-based Goldman Sachs, said yesterday that the company had no immediate comment.

The case is Landesbank Baden-Wurttemberg v. Goldman Sachs, 10-7549, U.S. District Court, Southern District of New York (Manhattan.)

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