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Liberty Mutual, Safeco Sue Goldman Alleging Securities Fraud

July 7 (Bloomberg) -- Liberty Mutual Insurance Co. and Safeco Corp. sued Goldman Sachs Group Inc. for “making misleading statements and omissions” in a preferred-stock offering for Federal Home Loan Mortgage Corp. in 2007.

The plaintiffs, which also include Peerless Insurance Co., said they invested $37.5 million in the offering of Freddie Mac shares, which Goldman underwrote, according to a filing yesterday in federal court in Boston.

Goldman claimed Freddie Mac “already met its regulatory capital requirements” and that the offering was made to increase the mortgage company’s capital base, the plaintiffs said.

“The stated purpose for the offering was false,” the plaintiffs said in the complaint. “Goldman knew or recklessly ignored that Freddie Mac did not meet its regulatory capital requirements, and Freddie Mac remained severely undercapitalized even after the sale of the preferred stock.”

“The suit is without merit and we intend to contest it vigorously,” Michael DuVally, a spokesman for New York-based Goldman Sachs, said in a telephone interview.

The insurers are seeking damages of more than $100 million and a trial by jury. They said in the complaint that their investments are “virtually worthless.”

Subprime Defaults

Freddie Mac, based in McLean, Virginia, is a corporation chartered by Congress to provide liquidity to the U.S. mortgage market. It buys mortgage loans from banks and bundles them into mortgage-backed securities that are sold to investors.

In 2006, home prices in the U.S. began to decline and subprime mortgage loans, given to homeowners who don’t have the highest credit ratings, began to default at increasing rates.

Freddie Mac issued 240 million shares of Series Z preferred shares in November 2007, raising about $5.9 billion, according to the lawsuit. The shares were backed by “billions of dollars in subprime residential mortgages,” the suit claimed.

Goldman’s bets against subprime-backed securities resulted in a profit of $3.7 billion in 2007, the insurance companies claimed in the suit.

Goldman Sachs rose $1.12, or 0.8 percent, to $135.01 at 4 p.m. in New York Stock Exchange composite trading. Freddie Mac was little changed at 37 cents in Nasdaq Stock Market trading. Boston-based Liberty, Seattle-based Safeco and Keene, New Hampshire-based Peerless don’t trade publicly.

The case is Liberty Mutual Insurance Co. v. Goldman Sachs & Co., 11-11194, U.S. District Court, District of Massachusetts (Boston).

To contact the reporter on this story: Don Jeffrey in New York at djeffrey1@bloomberg.net.

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

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