In 2010, the U.S. Senate’s Permanent Subcommittee on Investigations chair Carl Levin (D-MI), flagged the investments known as the Hudson Mezzanine funding deals, accusing Goldman Sachs of betting against its own clients during the MBS meltdown in 2008.
As one of the most prominent faces of the 2008 economic meltdown and recovery, Goldman Sachs has faced an enormous amount of (well-deserved) regulatory and civil litigation. Specifically, the New York-based finance giant has taken blow after repeated blow on its home turf regarding its marketing of mortgage-backed securities (MBS). It was in U.S. District Court for the Southern District of New York where the company agreed to a massive settlement with the Federal Housing Finance Agency (FHFA) in 2014. The parties agreed to a $3.15 billion penalty for providing misleading information regarding the company’s sales of private-label MBS investments to Fannie Mae and Freddie Mac. In consecutive days last month, Goldman Sachs agreed to a $270 million settlement in the New York court against the NECA-IBEW pension fund, among others, as well as its share of a $235 million settlement alongside banks UBS and Citigroup in the very same court.
This is why Tuesday’s ruling in the Southern District Court comes with some degree of surprise. U.S. District Judge Victor Marrero dismissed a longstanding class-action suit involving toxic mortgage-based investments known as Collateralized Debt Obligations (CDO), which became a target of a Senate committee investigation into the 2008 financial collapse. In 2010, the U.S. Senate’s Permanent Subcommittee on Investigations chair Carl Levin (D-MI), flagged the investments known as the Hudson Mezzanine funding deals, accusing Goldman Sachs of betting against its own clients during the MBS meltdown in 2008. In a 2010 hearing, Levin told the company’s CEO Lloyd Blankfein that, “The CDO imploded within two years: Your clients lost; Goldman profited,” adding that the practice “is a fundamental conflict of interest,” and “raises a real ethical issue.”
Following the Congressional investigation, the hedge fund Dodona LLC., representing over 70 investors who purchased over $2 billion in Hudson Mezzanine bonds, filed a lawsuit in September, 2010. Dodona attorneys accused the company and two Goldman Sachs employees, Peter L. Ostrem and Darryl K. Herrick, of “recklessly or intentionally” selling the investments as a means to jettison Goldman’s risky subprime mortgage debt. Attorneys for the company claim that Dodona profited from the investments prior to the meltdown, and that the accusations in the lawsuit assume “clairvoyance” on the part of Goldman Sachs employees. The judge granted the case class-action status in January, 2014, saying that individual lawsuits regarding CDOs would “exponentially” raise costs and waste resources. Despite over five years of litigation, 1.5 million pages of documents, and 30 depositions, Judge Marrero granted Goldman Sachs a summary judgment, ruling that the plaintiffs had failed to provide “any specific information” that proved the company or its employees hid pertinent information from the investors.
Bloomberg Business – Bob Van Voris and Jody Shenn
Housing Wire – Trey Garrison
Reuters – Jonathan Stempel