NEW YORK A U.S. federal judge said on Thursday that shareholders can proceed with a lawsuit accusing Goldman Sachs Group Inc of concealing conflicts of interest in several collateralized debt obligation transactions, the fallout from which caused Goldman's stock price to tumble.
The lawsuit in Manhattan federal court consolidates claims from Goldman shareholders who said the firm failed to disclose it was betting against its clients by taking short positions in four CDO transactions it sold to investors.
U.S. District Judge Paul Crotty ruled that investors could proceed with claims that Goldman should have disclosed those positions to clients, as well as hedge fund Paulson & Co's alleged role in hand-picking risky subprime mortgages that went into one of the CDOs, known as Abacus.
According to the complaint, Goldman's actions caused its shares to trade at inflated levels.
The shares fell 12.8 percent on April 16, wiping out more than $12 billion of value, after the SEC filed a civil fraud lawsuit against Goldman over the Abacus CDO. Goldman settled the lawsuit for $550 million.
The shares fell another 3 percent on April 25 and 26, 2010, when the U.S. Senate released internal emails from Goldman reflecting its practice of taking short positions against securities sold to investors and again by 2 percent on June 10, 2010, when the U.S. Securities and Exchange Commission announced an investigation into the Hudson CDO transaction, according to the complaint.
Lawyers for Goldman argued the lawsuits and investigations themselves caused the stock price to drop, not its alleged omissions.
But "these suits and investigations can more appropriately be seen as a series of ‘corrective disclosures,' because they revealed Goldman's material misstatements - and indeed pattern of making misstatements - and its conflict of interest," Crotty wrote.
In a footnote, Crotty described as "Orwellian" Goldman's argument that annual reports touting its integrity and honesty were mere opinion, and not misleading statements, as plaintiffs claimed.
"If Goldman's claim of 'honesty' and 'integrity' are simply puffery, the world of finance may be in more trouble than we recognize," he wrote.
Crotty did dismiss a separate claim that the company should have disclosed Wells notices received by Fabrice Tourre and Jonathan Engol, two employees involved in the Abacus transaction.
The SEC issues Wells notices to any targets of its investigations when a preliminary decision has been made to recommend an enforcement action. However, it does not always lead to litigation and does not necessarily need to be disclosed to shareholders, Crotty wrote.
"Overall, we're thrilled with the decision," said Christopher Keller, a lead lawyer for the plaintiffs. "It knocked out one claim but kept alive the meat of our case."
A spokesman for Goldman declined to comment. Also named as defendants in the lawsuit are Goldman chief executive Lloyd Blankfein, chief financial officer David Viniar and chief operating officer Gary Cohn.
The case is In re Goldman Sachs Group Inc Securities Litigation, in the U.S. District Court for the Southern District of New York, no. 10-3461.
(Editing by Andre Grenon & Kim Coghill)