Goldman Lands in New Legal Tussle

On Friday, DZ Bank AG, a German lender, jumped the bandwagon of other German lenders and filed a lawsuit against The Goldman Sachs Group Inc. (GS - Analyst Report) for misrepresentation of documents while selling mortgage-backed securities (MBS), Bloomberg reported. The lodged complaint accuses Goldman of presenting modified documents related to the sale of over $188.6 million in residential mortgage-backed securities.

The Allegation

DZ Bank alleged that Goldman issued misleading statements with omissions related to the mortgage-backed securities and concealed risks associated with these securities. The plaintiff claims that the documents used for offering the securities contained fraudulent statements or omissions regarding the risks associated with the investments. Misinterpretation of these risks led to the investments, which incurred losses at current levels.

The case has been filed in the New York State Supreme Court in Manhattan and the company demands compensation for the damages. However, Goldman has refrained from commenting on the issue.

Others Facing Similar Issues

Last week, UBS AG (UBS - Analyst Report) was censured by the U.S. regulator for credit unions –National Credit Union Administration (NCUA) – for misrepresentation of documents while selling MBS worth $1.1 billion to two credit unions – U.S. Central Federal Credit Union and Western Corporate Federal Credit Union, which collapsed later.

Similar suits have been filed in the past by NCUA against other big shots like JPMorgan Chase & Co. (JPM - Analyst Report), Royal Bank of Scotland Group Plc. (RBS), Goldman as well as against Wachovia, which is now a unit of Wells Fargo & Co. (WFC - Analyst Report). Moreover, settlements have been reached by NCUA with Deutsche Bank AG (DB - Snapshot Report), Citigroup Inc. (C - Analyst Report) and HSBC Holdings Plc. (HBC - Analyst Report), worth over $170 million.

Our Viewpoint

Troubles for Goldman seem to be unending, as only recently it was sued by two other German lenders – IKB Deutsche Industriebank AG (IKB) and Bayerische Landesbank in the Supreme Court over the same issue worth $73.2 million and $511.9 million, respectively.

The array of lawsuits has continued for the major U.S. banks since the financial meltdown. Last month, another Wall Street Biggie – Morgan Stanley (MS - Analyst Report) along with Goldman was sued by HSH Nordbank AG, a German lender, related to the sale of over $524 million and $110 million, respectively, in residential mortgage-backed securities.

Numerous lawsuits alleging banks of such wrongdoings are expected to tarnish their reputation and financials over time. However, the investors and other financial institutions bearing the brunt of these faulty practices are expected to be fairly compensated.

Goldman currently retains a 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.