* Dodona hedge fund allowed to pursue most claims
* Goldman said to create Hudson CDOs to offload subprime
* Goldman declines comment
* US Senate subcommittee faulted Goldman over Hudson CDOs
By Jonathan Stempel
NEW YORK, March 21 Goldman Sachs Group Inc
lost its bid to dismiss a lawsuit accusing it of
defrauding investors by selling risky debt linked to subprime
mortgages that it planned to bet against.
The decision by U.S. District Judge Victor Marrero in New
York keeps alive a hedge fund's claims over a $2 billion
offering of collateralized debt obligations, amid intense
scrutiny over Goldman's activities before and after the 2008
Marrero said the hedge fund Dodona I LLC may pursue nearly
all its claims against Goldman, including that the Wall Street
bank recklessly or intentionally sold the Hudson Mezzanine
Funding CDOs to offload subprime risk on unsuspecting investors.
"Goldman's sudden -- and prescient -- shift to reducing
subprime risk supports the inference that it possessed some
unique insight" about the "bittersweet potion" of CDOs it was
selling, Marrero wrote in a 64-page decision.
A Goldman spokesman, Michael DuVally, declined to comment.
Richard Klapper, a lawyer for the bank and co-defendants Peter
Ostrem and Derryl Herrick, who were Goldman structured finance
executives, did not immediately return a call seeking comment.
Lawrence Lederer, a lawyer representing Dodona, called
Marrero's decision "extremely well-reasoned, measured, and very
substantially supported. We are eager to ultimately try the case
on behalf of our client and other investors in the Hudson CDOs."
SCRUTINY FROM WASHINGTON
The decision was issued one week after Goldman faced a
public assault from former banker Greg Smith, who in a New York
Times op-ed piece called the bank a "toxic" place that put its
own interests ahead of those of its clients.
Goldman's CDO practices have drawn regulatory scrutiny. In
April 2010, Goldman agreed to pay $550 million to settle U.S.
Securities and Exchange Commission charges that it sold the
risky Abacus 2007-AC1 CDO while letting hedge fund billionaire
John Paulson bet against it. The bank did not admit wrongdoing.
Last April, the U.S. Senate Permanent Subcommittee on
Investigations concluded that Goldman tried to profit at
clients' expense ahead of the 2008 financial crisis by shedding
exposure to subprime mortgages, including by selling the Hudson
securities, and then shorting that market.
"RUBE GOLDBERG-LIKE" SECURITIES
Dodona was formed in 2007 by Alan Brody, who also created
the firm Epirus Capital Management LLC.
It accused Goldman of creating the Hudson Mezzanine Funding
2006-1 and 2006-2 CDOs, which were backed by residential
mortgage-backed securities, in late 2006 as part of a secret
scheme to offload subprime risk.
The hedge fund said it lost nearly all of its $4 million
investment, selling its holdings for 2.5 cents on the dollar in
October 2007 after having paid 95 cents or 100 cents on the
dollar the previous winter.
Marrero dismissed one claim by Dedona that accused Goldman
of market manipulation.
But the judge said even "large sophisticated" investors such
as Dodona might not have understood Goldman's CDOs, and that the
bank's boilerplate disclosures on their "speculative" nature
might be inadequate.
Goldman "created the synthetic CDOs here in dispute, 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," the judge wrote.
The case is Dodona I LLC v. Goldman Sachs & Co et al, U.S.
District Court, Southern District of New York, No. 10-07497.