Goldman Sachs Wins Toxic MBS Lawsuit Filed by Investors

Goldman Sachs received a victory in a class action lawsuit accusing the investment banking firm of knowingly selling toxic mortgage-backed securities to hedge fund Dodona I and other investors in 2007 before the financial crisis, according to media reports.

U.S. District Judge Victor Marrero in the U.S. District Court for the Southern District of New York ruled that there was no evidence that Goldman knew the securities would fail or that Goldman failed to disclose any known risk to the securities.

Goldman Sachs spokesman Michael DuVally told DS News that the firm is pleased with the court's decision. Attorneys for Dodona did not immediately respond to a request for comment.

Tuesday's verdict ended a five-year long battle that began in September 2010 when Dodona sued Goldman on behalf of investors over two offerings of collateralized debt obligation (CDO) securities known as the Hudson Mezzanine Funding 2006-1 and Hudson Mezzanine Funding 2006-2, which were sponsored by Goldman. According to Berger & Montague, the firm that represented Dodona in this case, Dodona alleged that, "in a classic case of 'heads we win, tails you lose,' the defendants failed to disclose to investors both that they structured the Hudson CDOs in late 2006 and early 2007 to decrease Goldman's own then-existing exposures to subprime mortgage-related financial instruments, and that Goldman would profit from its own short positions when those securities lost value." Dodona claimed that Goldman was in violation of the Securities and Exchange Act of 1934 by selling securities that were structured to fail.

An amended complaint filed by Dodona in 2011 stated that the Hudson 1 CDO was comprised of a $837 million offering of securities and a $1.2 billion senior swap transaction; the Hudson 2 CDO was comprised of a $407.9 million worth of securities. Dodona's complaint states that by the fall of 2007, " both CDOs had, in fact, declined in value significantly, saddling Plaintiff and other investors with enormous losses."

In January 2014, Marrero rejected Goldman's bid to have the suit dismissed on the grounds that the claims made by Dodona and investors were too "rife with differences, idiosyncrasies, and conflicts" to be pursued within the same complaint, according to a report from Reuters. Goldman also lost a bid to have the suit dismissed in March 2012.

In August 2015, Goldman told Marrero that it made no misrepresentations to Dodona with regard to the two Hudson securities.