Goldman Sachs to shell out $272M to settle mortgage suit led by union pension funds

A group of over 400 bond investors will get $272 million from Goldman Sachs Group over a faulty claim and misleading disclosures in mortgage securities selloff. Two electrical union pension funds led the group of bond investors in suing Goldman Sachs during crisis days of 2008.

It was alleged by investors that mortgage securities were bearing faulty loans. Ending the one of the longest pending investors' suit, Goldman Sachs has agreed to close the dispute by paying $272 million to bond investors numbering over 400. The total value of certificates Goldman Sachs underwrote is estimated to be $11 billion.

The two unions, an Illinois-based Electrical Workers Pension Fund and the NECA-IBEW Health and Welfare Fund fought for the investors all these years. The investors filed the suit challenging the quality and transparency of mortgage pass-through certificates and asset-backed certificates that were issued by different securitization trusts in 2007.

Goldman Sachs made false and misleading statements about the quality of these mortgage certificates, and investors further allege that these registration statements for the trusts violated federal securities laws.

Goldman Sachs claimed that the certificates as high-rated fixed income products. These certificates were initially rated as 'AAA' at the time of offering to the investors. The Plaintiffs argued that these certificates were a risky investment, but in fact, these were nothing but junk or worse rated certificates. A majority of collateral in the certificates were subsequently downgraded into junk status as loans made by firms such as Greenpoint Mortgage Funding and GSAA Home Equity.

The court case took a dramatic turn in favor of bond investors on an appeal with the second circuit. This allowed plaintiffs to join the case on behalf of investors. This had further led to about six cases involving security litigation to gain standing. All these securities-related cases were filed during the financial crisis period.

A mortgage-backed security (MBS) means an asset-backed security. Investors can buy a mortgage or collection of mortgages as a security. These securities are rated as per the value oft the asset, quality and terms of the mortgage, and other parameters as defined by law.

Some of these cases were related to a settlement between JPMorgan Chase and its mortgage investors. The legal firm of NECA-IBEW is Robbins Geller Rudman. In a telephone interview with Forbes, Robbins Geller said that it was an extraordinary result and it took seven years to reach the settlement.

Robbins Geller Rudman and Goldman Sachs made an appeal to Judge Miriam Goldman Cedarbaum at Southern District of New York to approve the settlement. Goldman Sachs has already set aside $1.45bn for legal costs and regulatory proceedings including mortgage-related settlements.

Generally courts dismiss such claims by bond investors. The credit for the success of 400 bond investors goes to the two unions. This highlights the efforts put in by NECA-IBEW and electrical workers pension fund for the settlement.