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
Selling short involves betting that an investment will fall
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.
INVESTMENT UNDERSTANDABLE ONLY TO SELECT FEW
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.