Goldman Investor Suit Over CDO Conflict Downgraded by Court (1)

Goldman Sachs Group Inc. won a federal appeals court ruling downgrading a long-running shareholder suit over an alleged conflict of interest in the marketing of a collateralized debt obligation that collapsed during the subprime crisis.

The US Court of Appeals in Manhattan on Thursday decertified the class in the case, reversing a lower court ruling that had allowed it to proceed as a class action. The ruling limits the suit to the plaintiffs directly involved in the case, led by Arkansas and West Virginia pension funds, rather than potentially applying to all shareholders in Goldman at the time.

Lawyers for the pension funds didn’t immediately respond to emails seeking comment on the ruling.

“This is a nice win for Goldman in a tortured 13-year lawsuit that went up and down on multiple appeals, including to the Supreme Court,” said Elliot Stein, senior litigation analyst for Bloomberg Intelligence. “The decision likely removes for good the risk of a $13 billion lawsuit that we thought might eventually settle for about $400 million.”

The plaintiffs claim they were misled by Goldman about a CDO portfolio known as Abacus, with the bank allegedly withholding the fact that hedge fund Paulson & Co. had chosen the securities for Abacus and later bet against it. John Paulson rose to fame by shorting mortgage-backed securities ahead of the subprime crisis.

Goldman in 2010 agree to pay $550 million to settle a Securities and Exchange Commission suit making similar claims. The pension funds sued Goldman, former Chief Executive Officer Lloyd Blankfein, former Chief Financial Officer David Viniar and former Chief Operating Officer Gary Cohn in 2011.

The appeals court said Goldman effectively rebutted claims that its misrepresentations about the CDO affected its share price. The case had previously been argued all the way to the US Supreme Court, which ruled in June 2021 that Goldman had the burden of proof to show the lack of price impact.

A lower court had previously found Goldman failed to meet that burden and certified a class of all investors who acquired Goldman shares between February 5, 2007, and June 10, 2010. The appeals court decision makes it more difficult for the investors to pursue their claims and reduces their leverage in any possible settlement of the case, which has been pending for more than a decade.

Stein said the investors may seek review of the decision by the full appeals court or by the Supreme Court, but that they’re unlikely to be successful.

The case is Arkansas Teacher Retirement System v. Goldman Sachs Group Inc., 22-484, Second US Circuit Court of Appeals (Manhattan).

(Updates with details from ruling in third paragraph.)

To contact the reporter on this story:
Bob Van Voris in federal court in Manhattan at rvanvoris@bloomberg.net

To contact the editors responsible for this story:
Misyrlena Egkolfopoulou at megkolfopoul@bloomberg.net

Anthony Lin

© 2023 Bloomberg L.P. All rights reserved. Used with permission.