In 2007, Goldman Sachs sold its collateralized debt obligation package. These obligations were tied to subprime mortgages. An investor filed a lawsuit against Goldman Sachs, accusing the firm of making misleading statements regarding ethical standards. The firm’s actions are back under the microscope because a federal district judge refused to dismiss the investor’s lawsuit.
Because the judge did not dismiss the investor’s lawsuit, it will go into the discovery phase, which means that the plaintiff investor has a right to documents from Goldman Sachs related to the collateralized debt obligations that were sold in 2007. The plaintiff investor will be looking for evidence of misconduct, including disproving statements by Goldman Sachs. The statements are alleged to be misleading and are concerning whether Goldman Sachs had a conflict of interest. The conflict of interest is that Goldman Sachs allegedly failed to disclose that it was taking short positions against the sale of four C.D.O.s
In 2009, the Securities and Exchange Commission informed Goldman Sachs that S.E.C. staff was recommending an enforcement action. The same judge decided not to disclose that notice. A claim was filed regarding that ruling, but the judge dismissed the claim in a “win” for Goldman Sachs.
In one deal, Goldman Sachs did not disclose that its clients had a hand in selecting underlying mortgage-backed securities. Goldman Sacs reached a $550 million settlement with the S.E.C. over that issue, and admitted that it made a “mistake” when it did not disclose that the client had economic interests that were not in the best interests of C.D.O. investors.
Fraudulent practices such as this could cause investors to lose money, and because of this, the S.E.C. requires full disclosure of all conflicts of interest regarding financial matters when selling items tied to subprime mortgages – items already in financial trouble.
Source: New York Times, “The Litigation That Haunts Goldman Sachs,” Peter Henning, June 25, 2012