By Jonathan Stempel
NEW YORK Jan 23 Goldman Sachs Group Inc must face a class-action lawsuit accusing it of defrauding investors to whom it sold $2 billion of risky debt linked to subprime mortgages that it was betting against before the 2008 financial crisis, a federal judge ruled on Thursday.
U.S. District Judge Victor Marrero in Manhattan rejected Goldman's argument that claims by investors, led by the hedge fund Dodona I LLC, over collateralized debt obligations known as Hudson Mezzanine Funding were too "rife with differences, idiosyncrasies and conflicts" to be pursued together.
Marrero said that to require individual lawsuits over the CDOs, which he once characterized as "Rube Goldberg-like," would "exponentially" raise costs and waste judicial resources.
Class certification can make it easier for plaintiffs to obtain larger recoveries at lower cost.
Goldman spokesman Michael DuVally declined to comment. Lawrence Lederer, a lawyer for Dodona, was not immediately available to comment.
Dodona was formed in 2007 by Alan Brody, who also created the firm Epirus Capital Management LLC.
Dodona accused Goldman of creating Hudson Mezzanine Funding 2006-1 and 2006-2, which were backed by residential mortgage-backed securities, in late 2006 to offload subprime risk on unwitting investors and then secretly selling the CDOs short.
Selling short involves betting that an investment will fall in value.
Dodona said it bought $4 million of Hudson notes in early 2007, but lost 97 percent of its investment when it sold them at 2.5 cents on the dollar just nine months later.
In April 2011, the U.S. Senate Permanent Subcommittee on Investigations cited the Hudson CDOs as evidence that Goldman tried to profit at clients' expense ahead of the financial crisis by shedding exposure to subprime mortgages.
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Goldman and many other large banks have faced lawsuits accusing them of selling risky mortgage-backed securities that they knew or should have known would lose value. Some lawsuits also have accused banks of surreptitiously betting against the securities, or letting favored clients do so.
Marrero in March 2012 wrote that the Hudson CDOs were "a form of investment instrument that, Rube Goldberg-like, few but a select group of its own designers, engineers and lawyers could clearly explain, let alone understand, precisely how it functions or exactly what it does."
Goldman has also been sued over other mortgage-linked debt.
In April 2010, the U.S. Securities and Exchange Commission accused the bank and vice president Fabrice Tourre of selling the risky Abacus 2007-AC1 CDO in early 2007, while letting hedge fund billionaire John Paulson bet against it.
Goldman settled with the SEC for $550 million in July 2010, without admitting wrongdoing. Tourre was found liable for fraud by a federal jury in Manhattan last August; a judge is weighing what penalties to assess ahead of a likely appeal.
Dodona is represented by law firm Berger & Montague, which Marrero named as class counsel in the Hudson CDO case.
The case is Dodona I LLC v. Goldman Sachs & Co et al, U.S. District Court, Southern District of New York, No. 10-07497.