US Court Revives Mortgage Debt Class-Action vs. Goldman

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Goldman SachsBy Jonathan Stempel

NEW YORK, Sept 6 - A federal appeals court has revived a lawsuit accusing Goldman Sachs Group Inc (GS) of misleading investors about the risks associated with mortgage securities offerings.

Thursday's decision by the 2nd U.S. Circuit Court of Appeals in New York could subject banks to a wider array of claims by mortgage securities investors, by letting them sue over securities in which they did not specifically invest themselves.

The decision allows lead plaintiff NECA-IBEW Health & Welfare Fund, an electrical workers' pension fund that owned some mortgage-backed certificates underwritten by Goldman, to pursue a class-action case on behalf of investors in other certificates backed by mortgages from the same lenders.

"Plaintiff has class standing" to pursue claims under federal securities law, Circuit Judge Barrington Parker wrote for a unanimous three-judge panel, "because such claims implicate the same set of concerns as plaintiff's claims."

Parker also said the fund need not allege out-of-pocket losses to pursue claims over illiquid securities. He said this was because losses could exist if there were credit rating downgrades, or borrowers appeared unable to make payments.

The decision reversed parts of rulings in 2010 by U.S. District Judge Miriam Goldman Cedarbaum in Manhattan.

It reinstated claims over seven securities offerings, all dating from 2007, out of the 17 that had been challenged.

Goldman and its rivals have faced thousands of lawsuits by investors seeking to recoup losses on mortgage securities.

The investors typically claim they were misled about the risks relating to the underlying home loans, most of which were made before or as the U.S. housing slump took hold in 2007.

Goldman spokesman Michael DuVally declined immediate comment, having yet to review the decision.

Joseph Daley, a partner at Robbins Geller Rudman & Dowd representing the NECA-IBEW fund, did not immediately respond to requests for comment. The fund is based in Decatur, Illinois, and filed the case in December 2008.

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According to the decision, the NECA-IBEW fund had bought certificates from two Goldman-led offerings that contained loans made by GreenPoint Mortgage Funding, later part of Capital One Financial Corp (COF), and Wells Fargo & Co (WFC).

The 17 offerings that were the basis of the lawsuit were sold under the same registration statement, and also contained loans from several other mortgage lenders.

These lenders included Countrywide, later part of Bank of America Corp (BAC); National City, later part of PNC Financial Services Group Inc (PNC); SunTrust Banks Inc (STI); and Washington Mutual, later part of JPMorgan Chase & Co (JPM).

The appeals court found that the plaintiff may represent investors in seven offerings backed by GreenPoint or Wells Fargo loans: the two it invested in, plus five others. It said the other 10 offerings were too different to be part of the case.

In justifying why the NECA-IBEW fund could represent an investor class, the 2nd Circuit cited a 2003 U.S. Supreme Court case over affirmative action at the University of Michigan.

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That court allowed a white prospective transfer student to represent prospective freshmen and others challenging the use of race in undergraduate admissions, saying this use was not "significantly different" in transfer and freshman admissions.

The 2nd Circuit decision contrasts with rulings by some other judges in determining whether mortgage debt investors can sue over securities they did not buy.

In November 2010, for example, U.S. District Judge Mariana Pfaelzer in Los Angeles on this basis and others narrowed a lawsuit against Bank of America, reducing the amount of mortgage securities involved to $31 billion from $352 billion.

Goldman shares rose $3.66, or 3.3 percent, to $113.60 in afternoon trading on the New York Stock Exchange.

The case is NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co et al, 2nd U.S. Circuit Court of Appeals, No. 11-2762.

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