By Jessica Dye
NEW YORK, June 21 A U.S. federal judge said on
Thursday that shareholders can proceed with a lawsuit accusing
Goldman Sachs Group Inc of concealing conflicts of
interest in several collateralized debt obligation transactions,
the fallout from which caused Goldman's stock price to tumble.
The lawsuit in Manhattan federal court consolidates claims
from Goldman shareholders who said the firm failed to disclose
it was betting against its clients by taking short positions in
four CDO transactions it sold to investors.
U.S. District Judge Paul Crotty ruled that investors could
proceed with claims that Goldman should have disclosed those
positions to clients, as well as hedge fund Paulson & Co's
alleged role in hand-picking risky subprime mortgages that went
into one of the CDOs, known as Abacus.
According to the complaint, Goldman's actions caused its
shares to trade at inflated levels.
The shares fell 12.8 percent on April 16, wiping out more
than $12 billion of value, after the SEC filed a civil fraud
lawsuit against Goldman over the Abacus CDO. Goldman settled the
lawsuit for $550 million.
The shares fell another 3 percent on April 25 and 26, 2010,
when the U.S. Senate released internal emails from Goldman
reflecting its practice of taking short positions against
securities sold to investors and again by 2 percent on June 10,
2010, when the U.S. Securities and Exchange Commission announced
an investigation into the Hudson CDO transaction, according to
Lawyers for Goldman argued the lawsuits and investigations
themselves caused the stock price to drop, not its alleged
But "these suits and investigations can more appropriately
be seen as a series of 'corrective disclosures,' because they
revealed Goldman's material misstatements - and indeed pattern
of making misstatements - and its conflict of interest," Crotty
In a footnote, Crotty described as "Orwellian" Goldman's
argument that annual reports touting its integrity and honesty
were mere opinion, and not misleading statements, as plaintiffs
"If Goldman's claim of 'honesty' and 'integrity' are simply
puffery, the world of finance may be in more trouble than we
recognize," he wrote.
Crotty did dismiss a separate claim that the company should
have disclosed Wells notices received by Fabrice Tourre and
Jonathan Engol, two employees involved in the Abacus
The SEC issues Wells notices to any targets of its
investigations when a preliminary decision has been made to
recommend an enforcement action. However, it does not always
lead to litigation and does not necessarily need to be disclosed
to shareholders, Crotty wrote.
"Overall, we're thrilled with the decision," said
Christopher Keller, a lead lawyer for the plaintiffs. "It
knocked out one claim but kept alive the meat of our case."
A spokesman for Goldman declined to comment. Also named as
defendants in the lawsuit are Goldman chief executive Lloyd
Blankfein, chief financial officer David Viniar and chief
operating officer Gary Cohn.
The case is In re Goldman Sachs Group Inc Securities
Litigation, in the U.S. District Court for the Southern District
of New York, no. 10-3461.