Goldman Sachs’s CEO and other top officers are accused in a pair of shareholder lawsuits of lax oversight in deals involving risky mortage-backed securities that later went bad.
The lawsuits filed on Thursday in New York State Supreme Court name Lloyd Blankfein and the firm’s entire board of directors as defendants.
The suits follow civil fraud charges filed last week by the Securities and Exchange Commission (SEC) over the same investments.
The SEC says Goldman committed fraud by failing to disclose important information about the securities that might have scared off investors.
The two suits, filed by shareholders Robert Rosinek and Morton Spiegel, accuse Blankfein and other officers of “systematic failure” over three-and-a-half years for not properly vetting 23 mortgage-linked deals at the center of the SEC suit. Those deals, called Abacus, led to US$1 billion in losses.
A Goldman spokesman declined to comment.
The suits appear to be the first shareholder cases related to the Abacus deals. If so, they may mark the start of what legal experts expect will be a flood of shareholder cases against Goldman Sachs.
The plaintiffs seek unspecified monetary damages.
Goldman Sachs is preparing to defend itself against the US government allegations by arguing that it was unsure where housing prices were headed and did not act against its clients’ interests, the Washington Post reported on its Web site on Friday.
The Post reported that it had obtained an 11-page document that describes how top Goldman executives debated the future of the mortgage market in 2006 and 2007.
The document was drawn up as part of preparation for Blankfein’s testimony next week to the Senate Permanent Subcommittee on Investigations.
In one meeting outlined in the document, financial officer David Viniar met with Goldman’s mortgage traders and risk managers on Dec. 14, 2006, to discuss strategy. They decided to reduce Goldman’s exposure in the subprime market, the Post reported.
While Goldman did acknowledge shorting the overall market at times, the document says it was temporary and only during periods where Goldman was reshuffling its portfolio, the Post reported.
However, while making this shift, critics say, Goldman continued to sell mortgage-related investments to clients interested in the subprime loan market, the Post said.
Further, the document said that Goldman seriously considered making new mortgage investments at other times. In 2007, for example, managing director Richard Ruzika argued that Goldman was too pessimistic about the housing decline. Another executive made a similar statement as late as August 2007.
Also in the document, Goldman argued that it was a relatively small player in mortgages, making only US$500 million from the residential mortgage business in 2007 — about 1 percent of the firm’s revenues.
While the SEC probe continues, a US government watchdog said on Friday that it would investigate the SEC’s fraud lawsuit. Republicans have implied political motives were behind the SEC’s decision to sue Goldman.
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