Last week, the federal judge in Manhattan ordered The Goldman Sachs Group Inc. (GS) to deal with a securities class-action lawsuit. The lawsuit accused Goldman of misleading investors relating to mortgage-backed securities worth $698 million.
Investors, led by the Public Employees’ Retirement System of Mississippi, filed a lawsuit against Goldman in federal court in Manhattan over GSAMP Trust 2006-S2 securities. The securities, which were offered to the investors, were backed by second-lien home loans. These loans were bought from California-based subprime lender New Century Financial Corp., which got bankrupt in 2007.
The complaint lodged claims that Goldman deceptively sold the sub-prime mortgage-linked securities that gradually failed and also misrepresented the value of instrument by providing materially misleading statements.
Moreover, the Mississippi pension fund alleges that Goldman failed to expose New Century’s ignorance in meeting its own underwriting standards and the company’s use of overstated appraisals. Goldman has been blamed for overlooking these issues while buying loans from New Century and selling them as securities to investors. Eventually, the market showed downtrend, resulting in huge losses for the common investors.
For the last few months, Goldman has been facing a number of lawsuits related to mortgage-backed securities. In 2010 also, Goldman settled a charge by paying $550 million for not disclosing the role of a hedge fund in formulating the collateralized debt obligations (CDOs) to the buyers and taking a short position and betting on them to perform poorly in the open market.
However, in December 2011, South Korean insurer-Heungkuk Life Insurance Co. withdrew the case filed against New York-based Goldman, earlier in 2011. The withdrawal of this lawsuit resulted after both the firms agreed to make out-of-court settlement through negotiations.
Therefore, the step taken by Goldman represents that the company is accepting a fine of millions of dollars, but would restrict the commotion that has resolute the company, since it has been involved in a number of lawsuits.
Among other banks, Citigroup Inc. (C), JPMorgan Chase & Co. (JPM), HSBC Holdings Plc (HBC) and M&T Bank Corp. (MTB) have also been legally accused for misrepresenting documents related to mortgage-backed securities and other losses.
With the latest development, Goldman might be in trouble which would dent its financials. Goldman currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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