Goldman Sachs Must Face Lawsuit Over 2007 Mortgage Bonds

Goldman Sachs Group Inc. failed to persuade a federal judge to again throw out a securities lawsuit over residential mortgage-backed securities it sold in 2007 after an appeals court overturned an earlier decision.

U.S. District Judge Miriam Goldman Cedarbaum in Manhattan, who had dismissed the lawsuit by the Police and Fire Retirement System of the City of Detroit twice before, ruled yesterday that a 2012 appellate decision overturning her findings in a related lawsuit had “significantly changed the landscape.”

In 2012 the U.S. Court of Appeals in New York reversed Cedarbaum’s ruling that the NECA-IBEW Health and Welfare Fund, which had sued Goldman Sachs in 2008, had failed to claim a sufficient loss from the investments. The appeals panel also threw out her ruling that the fund couldn’t represent investors in offerings of the securities it hadn’t bought itself.

Yesterday’s ruling follows a New York state appeals court decision in January that Goldman Sachs must face fraud claims in a $1 billion lawsuit filed by an Australian hedge fund, Basis Capital Funds Management Ltd.’s Basis Yield Alpha Fund, over collateralized debt obligations sold by the bank before the financial crisis of 2008. In 2010, Goldman Sachs reached a $550 million settlement with the U.S. Securities and Exchange Commission to resolve claims over the marketing of CDOs.

Judge Reversed

In the federal case, the Detroit pension fund filed a separate lawsuit in 2010 on behalf of investors that bought securities from the trust for which Cedarbaum had said NECA couldn’t bring claims. The judge had dismissed the Detroit fund’s lawsuit twice largely on her determination that it didn’t adequately allege how Goldman Sachs’s purported misrepresentations caused any loss.

After the higher court’s ruling, “the fact that PFRS received payments throughout the life of the certificates, and was arguably aware of the risk that there would not be a secondary market for its certificates, is immaterial,” Cedarbaum said in yesterday’s ruling.

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

The case is The Police and Fire Retirement System of the City of Detroit v. Goldman, Sachs & Co., 10-04429, U.S. District Court, Southern District of New York (Manhattan).

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