Goldman Sachs Group Inc was ordered by a federal judge to face a securities class-action lawsuit accusing it of defrauding investors about a 2006 offering of securities backed by risky mortgage loans from a now-defunct lender.
U.S. District Judge Harold Baer in Manhattan certified a class-action lawsuit by investors led by the Public Employees' Retirement System of Mississippi.
These investors claimed they lost money in the GSAMP Trust 2006-S2, a $698 million offering of certificates backed by second-lien home loans made by New Century Financial Corp, a California subprime mortgage specialist that went bankrupt in 2007.
Thursday's decision is a setback for Goldman, which had sought to force investors to bring their cases individually.
Class certification lets investors pool resources, which can cut costs, and can lead to larger recoveries than if investors are forced to sue individually.
Goldman spokesman Michael Duvally declined to comment.
The bank is one of many accused by Congress, regulators and others of having fueled the nation's housing crisis and 2008 financial crisis in part by having misled investors about the quality of mortgage debt they sold.
Goldman in 2010 agreed to pay $550 million to settle U.S. Securities and Exchange Commission fraud charges over a collateralized debt obligation it sold, Abacus 2007-AC1 CDO.
"CREATIVE CUTTING AND PASTING"
The Mississippi fund claimed the GSAMP offering documents were false and misleading, saying Goldman's boilerplate disclosures failed to reveal how New Century had ignored its own underwriting standards and used inflated appraisals.
It blamed Goldman's poor due diligence for the bank's failure to find these problems when it bought New Century's loans and packaged them into securities.
Goldman countered that class-action status was inappropriate given the wide range of certificates offered, the differences among the "highly sophisticated institutional investors" that bought the debt, and even that some investors might have had "storm warnings" about New Century's practices.
Baer rejected the defense, even faulting Goldman's "creative cutting and pasting" of a 200-page deposition to bolster its claim that the Mississippi fund was on notice of problems.
"In light of my finding that the common issues predominate, it does not seem likely questions regarding individual investor knowledge, statutes of limitation or any other issue will become unmanageable," Baer wrote.
David Wales, a partner at Bernstein Litowitz Berger & Grossmann, which was named lead counsel, declined to discuss Baer's ruling, but said the plaintiffs plan to proceed toward a possible October trial.
The case is Public Employees' Retirement System of Mississippi v. Goldman Sachs Group Inc et al, U.S. District Court, Southern District of New York, No. 09-01110.
(Reporting By Jonathan Stempel in New York; Additional reporting by Alison Frankel; Editing by Phil Berlowitz)