Goldman Again Entangled in Lawsuit - Analyst Blog
August 16 2011 - 12:11PM
Zacks
Yesterday, The Goldman Sachs Group Inc. (GS)
was sued by The Allstate Corporation (ALL), 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) 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), Citigroup Inc. (C), Deutsche Bank
AG (DB), Credit Suisse Group (CS) and
JPMorgan Chase & Co. (JPM), 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.
ALLSTATE CORP (ALL): Free Stock Analysis Report
BANK OF AMER CP (BAC): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
CREDIT SUISSE (CS): Free Stock Analysis Report
DEUTSCHE BK AG (DB): Free Stock Analysis Report
FREDDIE MAC (FMCC): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
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