Goldman in Trouble, Again

According to Reuters, the federal judge in New York rescinded the bid filed by The Goldman Sachs Group Inc. (GS - Analyst Report) regarding the dismissal of a lawsuit charged against the bank, accusing it of selling risky debts. The US District Judge, Victor Marrero, has ordered the plaintiff, Dodona I LLC, to pursue the proceedings over its claims against Goldman relating to the $2 billion offering of collateralized debt obligations (CDOs).

Established in 2007, hedge fund Dodona filed a lawsuit against Goldman in the federal court in New York over Hudson Mezzanine Funding 2006-1 and 2006-2 CDOs. The securities offered to the investors, were residential mortgage-backed securities.

CDOs typically repackage bonds and other assets into new securities. These are not traded on a public exchange, allowing firms like Goldman to generate fees through brokering deals between buyers and sellers. However, CDOs have performed miserably since these were invested in securities comprising sub-prime mortgages, which are known to have larger-than-average risk of defaulting in the market. Eventually, the market downturn ruined the investment banker's expectations, resulting in huge losses for the common investors.

The complaint lodged claims that Goldman deceptively sold the sub-prime mortgage-linked securities that gradually failed. In addition to that, it misrepresented the value of instrument by providing materially misleading statements.

According to Dodona, the investment followed Goldman's guidance, which indicated that the market for such securities had stabilized and this is a suitable time to enter into such markets. According to the suit, Goldman sold those investments having the idea of non-performance of such securities. The hedge fund's $4 million investment turned into huge losses in October 2007.

For the last few months, Goldman has been facing a number of lawsuits related to mortgage-backed securities. In 2010 also, Goldman settled a charge by paying $550 million for not disclosing the role of a hedge fund while formulating the CDOs to the buyers, taking a short position as well as 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 the financial crisis and the significant losses suffered by the investors.

The continuously increasing number of lawsuits will dent Goldman's reputation and its financials. However, investors, who have lost their hard-earned money in such investments, should feel relieved.

Among other banks, Citigroup Inc. (C - Analyst Report), JPMorgan Chase & Co. (JPM - Analyst Report), HSBC Holdings Plc (HBC - Analyst Report) and M&T Bank Corp. (MTB - Analyst Report) have also been legally accused for misrepresenting documents related to mortgage-backed securities and other losses in 2011.

Goldman currently retains its Zacks #3 Rank, which translates into a short-term 'Hold' rating. Considering the fundamentals, we also maintain a long term 'Neutral' recommendation on the stock.