Another domino has reportedly fallen in the aftermath of the mortgage-backed securities (MBS) meltdown that was mostly responsible for the worst economic downturn since the Great Depression. Multiple media outlets are reporting that Goldman Sachs will settle a class-action lawsuit led by the NECA-IBEW’s Health and Welfare Pension Fund of Illinois, among other investors, to the tune of $270 million. Reports of the proposed settlement were first disclosed on Friday, the same day a federal court approved a $235 million settlement for similar claims involving Goldman Sachs, along with UBS and Citigroup. That settlement came after a class, led by the New Jersey Carpenters Health Fund, accused the companies of concealing the risks involving MBS investments sold by the former Residential Capital LLC, prior to the 2008 crisis. It also comes just weeks after JP Morgan Chase reached $388 million settlement after being accused of misstating the risks of MBS investment packages a class of clients led by labor pension funds from Northern and Southern California.
The agreement, which has yet to be signed as of the time of publication, is expected to be disclosed in the very near future. The company declined to comment on reports of the settlement, as well as having declined all interview requests. Goldman Sachs did reveal in July, however, that it has set aside $1.45 billion for litigation and regulatory expenses. Home values in the U.S. declined 30 percent from its peak in mid-2006, and the stock market lost 50 percent of its value by the end of 2009, causing the value of the securities to decrease rapidly. Companies like Goldman Sachs and others responsible for underwriting the value of the securities based on default risk have continuously stated that they did not knowingly deceive their clients, and instead were victims of the recession themselves. The 2010 Dodd-Frank financial reform legislation gave federal regulators additional, albeit ambiguous, clout to prosecute various allegations of financial fraud both civilly and criminally. The legislation has led to a wave of settlements in order to avoid additional, harsher penalties.
Analyst Troy Kuhn believes the latest settlement will be the last in a long string of legal action against the company. In addition to last month’s agreement, Goldman Sachs agreed in August 2014 to pay a $3.15 billion (with a B) lawsuit filed by the Federal Housing Finance Agency (FHFA), involving similar MBS misconduct against Fannie Mae and Freddy Mac. In May, an arbitrator ordered Goldman Sachs to pay $100 million to Northern Australia Bank for a conflict of interest involving MBS investments. Also in May, New York’s top state-level appeals court revived a $120 million lawsuit filed against the Goldman Sachs by ACA Financial Guaranty Corp in 2013 regarding its purchase of MBS investments. Legal action involving MBS wrongdoing is expected to cease in the coming months as a New York appeals judge ruled last month that the six-year statute of limitations for breach of contract cases begins on the date that the contract is executed. Most cases involving MBS activity have already been litigated and/or settled, although Morgan Stanley is still involved in further cases.
Bloomberg Business – Lisa Sandler
Buidness ETC – Troy Kuhn
DS News – Brian Honea
Reuters –Karen Freifeld