* Plaintiffs failed to show directors knew of "red flags"
* No breach of duty in repaying TARP early
* Lawyer for shareholders not immediately available
By Jonathan Stempel
Aug 14 (Reuters) - Goldman Sachs Group Inc Chief Executive Lloyd Blankfein and other bank officials won the dismissal of a shareholder lawsuit accusing them of tolerating poor mortgage practices and quitting a federal bailout program early to boost executive pay.
U.S. District Judge William Pauley in Manhattan said the shareholders failed to show there were "red flags" to put bank directors on notice of "broken controls" in Goldman's mortgage servicing business, including that workers at its Litton unit may have been "robo-signing" documents.
Pauley also cited a similar lack of red flags to suggest directors knew Goldman was packaging troubled loans in residential mortgage-backed securities, including loans the bank sold "short" in a bet they would lose value.
The judge also said the plaintiffs did not show that directors acted in bad faith in letting Goldman repay $10 billion taken from the Troubled Asset Relief Program early, in June 2009, freeing the bank from restrictions on executive pay.
Pauley said the plaintiffs cannot amend their complaint alleging breaches of fiduciary duties, saying an earlier amended complaint failed to fix defects he had previously identified.
Lead plaintiffs included the Retirement Relief System of the City of Birmingham, Alabama, pension fund, as well as Michael Brautigam, an Ohio resident and Goldman shareholder.
Brian Brooks, a partner at Smith, Segura & Raphael representing the plaintiffs, did not immediately respond to requests for comment.
Goldman spokesman Michael DuVally declined to comment.
The case is a derivative lawsuit brought on behalf of Goldman, seeking changes in governance and internal controls, and with any payout going to the Wall Street bank rather than to shareholders.
Pauley said 15 current and former Goldman executives and directors had been named as defendants. Among these were Chief Operating Officer Gary Cohn, Chief Financial Officer David Viniar, and former director Rajat Gupta, who was convicted in June of insider trading in a separate case.
Goldman still faces other shareholder litigation. In June, for example, Pauley's colleague Paul Crotty said shareholders may pursue claims that they lost money after Goldman concealed conflicts of interest in how it put together several collateralized debt obligation transactions.
Last week, the U.S. Department of Justice said it ended a criminal probe into Goldman activity that predated the financial crisis, while the bank said the U.S. Securities and Exchange Commission ended a civil probe into a sale of $1.3 billion of subprime mortgage debt.
Goldman shares closed Tuesday down 0.3 percent at $103.26 on the New York Stock Exchange.
The case is In re: Goldman Sachs Mortgage Servicing Shareholder Derivative Litigation, U.S. District Court, Southern District of New York, No. 11-04544.