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The Goldman Sachs Group, Inc. (GS - Analyst Report) recently failed in its attempt to dismiss a lawsuit filed by life insurer Prudential Financial Inc. (PRU - Analyst Report) relating to misrepresentations in selling residential mortgage-backed securities. The lawsuit claimed damages of $375 million.

U.S. District Judge in Newark, N.J. claimed that Goldman distorted its underwriting standards and practices regarding the sale of around $375 million of residential mortgage-backed securities. However, the judge declared that the U.S. banking major will have additional opportunities to seek dismissal of the lawsuit.

Prudential and its affiliates had bought securities in 16 transactions from Goldman between Feb 2004 and Dec 2008, which they alleged were misrepresented. However, Goldman disputed that Prudential did not sufficiently support its case for fraud and relied on assumptions.

Many other U.S. banking majors like Bank of America Corporation (BAC - Analyst Report) and Goldman have been plagued by lawsuits over fraud during the sale of risky mortgage-linked securities, whose brisk decline in value was a primary factor to the financial crisis of 2008.

We believe that such lawsuits will dent banks’ reputation and legal expenses will remain an overhang on its financials. However, investors who have lost their hard-earned money in such investments should feel relieved.

Goldman is expected to announce its first quarter 2013 results on Apr 16. The Zacks Consensus Estimate for the quarter is pegged at $3.74 per share. The Zacks Earnings ESP for Goldman is +4.80% for the first quarter. This along with its Zacks Rank #3 (Hold) places the company for an expected earnings beat.

Among other major banks, JPMorgan Chase & Co. (JPM - Analyst Report) is also likely to deliver a positive earnings surprise this quarter as our model shows it has the right combination of elements – an Earnings ESP of +2.92% and a Zacks Rank #2 (Buy).

 

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