Goldman Again Entangled in Lawsuit

Yesterday, The Goldman Sachs Group Inc. (GS - Analyst Report) was sued by The Allstate Corporation (ALL - Analyst Report), the largest publicly traded U.S. home and auto insurer. The complaint lodged claims that Goldman misrepresented documents as an underwriter in the sale of over $123 million in mortgage-backed securities from April 2006 to March 2007.

Allstate alleged that Goldman issued misleading statements and omissions related to the mortgage-backed securities and has concealed risks associated with the securities. The company claims the documents used in offering the securities contained untrue statements or omissions, as to how risky the investments to be. These misrepresentations of the risks provoked investments, which have virtually no value at current levels.

Allstate has filed lawsuit in the New York State Supreme Court in Manhattan. The company demands for damages, which includes lost market value of the securities, principal and interest payments.

Last week, Goldman was sued by National Credit Union Administration (NCUA), the U.S. regulator of credit unions. The complaint lodged claims that Goldman violated federal and state securities laws and misrepresented documents as an underwriter in the sale of $1.2 billion in mortgage-backed securities.

However, the regulators are proactively trying to recover losses of credit unions through lawsuits against banks that were involved in malpractices related to selling mortgage-backed securities. The proceeds from these lawsuits would increase NCUA's insurance and emergency support funds to a considerable extent.

Earlier in July, Goldman was also sued by Liberty Mutual Insurance Co. and several other investors including Peerless Insurance Co., Employers Insurance Co., Safeco and Liberty Life Assurance Co. for misrepresenting the financial condition of Freddie Mac (FMCC - Analyst Report) as an underwriter of Freddie's offering of Series Z preferred stock in late 2007.

According to the lawsuit, Freddie Mac issued 240 million shares of Series Z preferred shares in November 2007, which increased approximately $5.9 billion. The shares were supported by billions of dollars in subprime residential mortgages. The investors alleged that Goldman misled them with statements and omissions related to the preferred stock offering based on which they invested $37.5 billion.

Last year also, Goldman settled a charge by paying $550 million for not disclosing the buyers the role of a hedge fund in formulating the CDOs and taking a short position and betting on them to perform poorly in the open market. The SEC has stepped up its investigation on Wall Street companies over the sale of CDOs that were responsible for significant losses suffered by the investors and financial crisis.

Previously, Allstate has also filed similar lawsuits against other banks such as Bank of America Corporation (BAC - Analyst Report), Citigroup Inc. (C - Analyst Report), Deutsche Bank AG (DB - Snapshot Report), Credit Suisse Group (CS - Snapshot Report) and JPMorgan Chase & Co. (JPM - Analyst Report), to recover losses over $2 billion of securities.

While such number of lawsuits will dent banks’ reputation and its financials, we believe that investors, who have lost their hard-earned money in such investments, should feel relieved.

Shares of Goldman currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. However, considering the fundamentals, we maintain a long-term Underperform recommendation on the stock.

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