The complaint alleges that Goldman executives misled investors about the health of Freddie Mac and the mortgage-backed securities underlying a preferred offering of Series Z stock on Nov. 29, 2007, while taking huge short positions on similar securities that netted Goldman $3.7 billion in profits that year.
Goldman's actions in underwriting the Series Z offering were part of a calculated pattern of deception in which Goldman not only profited from the collapse of the mortgage market, but also magnified the risks in the market by selling high risk, poor quality mortgage products to investors around the world,” the complaint said.
The plaintiffs — Liberty, Peerless Insurance Co., Employers Insurance Co. of Wausau, Safeco Corp. and Liberty Life Assurance Co. of Boston — became the latest group of investors to accuse of fraud for its handling of mortgage-backed securities. They claim they invested $37.5 million in the offering, paying an artificially inflated $25 per share.
Goldman, one of the main underwriters for the stock offering, allegedly claimed in documents announcing the offering that Freddie Mac had already met and exceeded capital requirements imposed by the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, and that it was selling the Series Z stock to bolster its capital base.
In fact, Goldman executives were aware that just a few days earlier the Office of Federal Housing Enterprise Oversight had chastised Freddie Mac for not meeting those requirements, according to the complaint.
As described in the April report from a U.S. Senate investigation of the housing market crash, Goldman executives allegedly helped lenders securitize high-risk loans in exchange for large fees, resecuritized mortgage-backed securities when they failed and made billions of dollars in undisclosed mortgage asset trades for its own benefit.
Even when Freddie Mac disclosed Nov. 20, 2007, that it had losses, the plaintiffs claim the $2 billion reported lost in the third quarter of 2007 was “grossly inadequate” because it did not disclose losses involving the $158 billion in subprime mortgage-backed securities it held.
“Goldman knew that if adequate write-downs and loan loss reserves had been reported at the time of the Series Z offering, there would have been no capital surplus, but instead a substantial capital deficit even with the proceeds of the Series Z preferred stock offering,” the suit said.
Knowing the value of its own subprime mortgage-backed securities had decreased in 2007, Goldman allegedly sold them off at prices higher than what it knew they were worth. According to the plaintiffs, “Goldman was shorting the very subprime loan originators that were Freddie Mac's lender clients.”
The complaint cites emails circulated by Goldman executives showing they knew and disregarded the fact that Freddie Mac's mortgage-backed securities were overvalued at the time of the Series Z offering.
The plaintiffs asked the court for treble compensatory damages, pre- and post-judgment interest, and reasonable attorneys' fees, costs and disbursements.