Goldman Investors Win Class Status in $13 Billion Case Over Mortgage-Backed Securities

(Bloomberg Law) -- Goldman Sachs Group Inc. investors who say the bank misled them about conflicts of interest secured class status Wednesday in federal district court in New York, following a June U.S. Supreme Court opinion.

The investment bank still hasn’t rebutted the presumption that the investors relied on its alleged misstatements by a preponderance of the evidence, even after a new look at the case “in light of the clarified guidance from the Supreme Court and Second Circuit,” the U.S. District Court for the Southern District of New York said.

Securities class plaintiffs must prove they relied on a defendant’s material misrepresentation or omission, and can invoke a presumption set out in the Supreme Court’s 1988 Basic Inc. v. Levinson decision to establish classwide reliance.

“Although it eases plaintiffs’ class certification efforts, the Basic presumption is not a blank check,” Judge Paul A. Crotty’s opinion said. “It may be rebutted at the class certification stage through a showing that the alleged misstatements in fact had no impact on stock price.”

The investors say Goldman’s statements about conflicts of interest related to certain collateralized debt obligation transactions “fraudulently maintained, rather than induced, an inflated share price,” Crotty’s opinion said. Thus, “any price impact must be measured via stock price decreases occurring after the alleged misstatements were revealed to be false.”

The SEC accused Goldman of creating and selling a portfolio known as Abacus without telling shareholders that the hedge fund Paulson & Co. had chosen the securities that made up the portfolio and later bet against the vehicle. The firm later paid $550 million to settle with the agency, and while it didn’t admit wrongdoing it said it had made a mistake in not disclosing Paulson’s role.

The Supreme Court in June set aside a prior ruling granting the investors the right to sue as a class, saying it wasn’t clear that the lower court had adequately considered whether the statements it made were too generic for investors to rely on them.

The ruling doesn’t come as a surprise, said Bloomberg Intelligence analyst Elliott Stein, who wrote in October that Goldman would likely struggle to beat the case despite the earlier rulings rejecting class certification. Crotty was likely to once again grant certification, having done so twice before, and there was likely enough of a link between Goldman’s generic statements and the truth of its conflicts.

The decision should move the $13 billion case “a little closer to settlement,” Stein said, although further appeals and other proceedings are likely. A resolution, which Stein estimates could be in the $400 million range, could still be months or years away, he said.

The plaintiffs “persuasively established a link” between the public’s discovery of Goldman’s conflicts of interest and its subsequent stock drops, and the analysis from two experts Goldman hired didn’t “persuasively undermine these findings,” according to the opinion.

The “heart” of the dispute is how generic the alleged misstatements are and whether that changes the price impact inference required for class certification. The statements weren’t “so generic as to diminish their power to maintain pre-existing price inflation,” something they “did in fact” do, Crotty said.

Goldman’s burden isn’t “merely to prove that the alleged misstatements were one of several sources of price impact, nor even that other sources loomed larger,” but instead to show they had “no price impact whatsoever,” the opinion said. “Even applying the Supreme Court’s updated guidance as to genericness, Defendants have not carried this burden.”

Labaton Sucharow LLP and Robbins Geller Rudman & Dowd LLP represent the investors as co-lead counsel. Sullivan & Cromwell LLP represents Goldman.

THe case is In re Goldman Sachs Grp. Inc. Sec. Litig., S.D.N.Y., No. 1:10-cv-03461, class certified 12/8/21.

To contact the reporter on this story: Jennifer Bennett in Washington at jbennett@bloomberglaw.com; Chris Dolmetsch in Federal Court in Manhattan at cdolmetsch@bloomberg.net

To contact the editors responsible for this story: Rob Tricchinelli at rtricchinelli@bloomberglaw.com; Carmen Castro-Pagán at ccastro-pagan@bloomberglaw.com

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