NEW YORK: A U.S. appeals court said a shareholder lawsuit accusing Goldman Sachs Group Inc of fraudulently claiming to put client interests before its own when creating risky subprime securities before the financial crisis, including a collateralized debt obligation known as Abacus, cannot proceed as a class action.
The 2nd U.S. Circuit Court of Appeals in Manhattan said on Friday a lower court judge imposed too high a burden on the Wall Street bank to show that its alleged conflicts of interest and misleading statements had no impact on its stock price.
While the 3-0 decision permits shareholders to again seek class certification, it may now be easier for Goldman to convince U.S. District Judge Paul Crotty, who had certified a class action in September 2015, not to let the plaintiffs sue as a group.
Thomas Dubbs, a lawyer for the shareholders, said he was "confident" a class action would again be certified. Goldman had no immediate comment.
Shareholders from February 2007 to June 2010 claimed to lose more than US$13 billion because Goldman had in regulatory filings and public comments overstated its ability to manage conflicts.
They said Goldman did this while concealing short positions that the bank or hedge fund manager John Paulson made in four subprime mortgage CDOs: Abacus 2007 AC-1, Anderson Mezzanine Funding 2007-1, Hudson Mezzanine Funding 2006-1, and Timberwolf.
Shareholders sued after news about federal enforcement activity hurt Goldman's stock, including when the Securities and Exchange Commission brought civil fraud charges in April 2010 against Goldman and vice president Fabrice Tourre over Abacus.
In certifying a class action, Crotty had said Goldman "failed to conclusively sever th link" between its statements and its stock price.
But in Friday's decision, Circuit Judge Richard Wesley, citing a more recent ruling involving Barclays Plc , said Goldman had only to show it more likely than not that its alleged misrepresentations did not affect the stock.
Wesley also said Crotty should have let Goldman present evidence of 34 dates prior to 2010 when news reports of its alleged conflicts did not hurt its stock price.
Absent any impact, shareholder claims could "completely collapse," Wesley said.
The SEC has estimated that Paulson made about US$1 billion by betting against Abacus.
Goldman settled with the SEC for US$550 million in July 2010, without admitting wrongdoing. A federal jury found Tourre liable in August 2013, and a judge later ordered him to pay more than US$856,000, including a fine.
The case is Arkansas Teachers Retirement System et al v Goldman Sachs Group Inc et al, 2nd U.S. Circuit Court of Appeals, No. 16-250.
(Reporting by Jonathan Stempel in New York; Editing by Tom Brown)