Goldman to defend Liberty Mutual securities fraud case vigorously
Goldman Sachs (GS) will vigorously defend itself against a lawsuit filed by Liberty Mutual Insurance Co. and several other investors who claim the investment bank misrepresented the financial condition of Freddie Mac when serving as underwriter for Freddie's offering of Series Z preferred stock in late 2007. Liberty Mutual and the other plaintiffs — which include Peerless Insurance Co., Employers Insurance Co., Safeco and Liberty Life Assurance Co. — claim they invested $37.5 billion in the offering "upon misrepresentations" Goldman made as the transaction's underwriter, according to court dockets. "The lawsuit is without merit," Goldman spokesman Michael DuVally said after the case was filed in a U.S. District Court in Massachusetts. Freddie Mac is not named as a defendant in the complaint. Instead, the case focuses solely on Goldman's role as underwriter to the transaction. The plaintiffs claim concerns over Freddie's capitalization level were already known at the time of the offering and that Freddie was exposed to risky subprime and Alt-A mortgages. "The Series Z preferred stock offering circular written by Goldman claimed that Freddie Mac already met its regulatory capital requirements, and that the purpose of the Series Z preferred stock offering was to bolster Freddie Mac’s capital base," the plaintiffs contended in their complaint. "As plaintiffs have learned, the stated purpose for the offering was false. Goldman knew or recklessly ignored that Freddie Mac did not meet its regulatory capital requirements, and Freddie Mac remained severely undercapitalized even after the sale of the preferred stock," according to the complaint. The plaintiffs claim the misrepresentation of the risks Freddie actually faced prompted them to take part in investments that are now "worthless." Goldman has defended itself and its role in the mortgage marketplace in the past few years. A few months ago, the investment bank responded directly to a Senate report that criticized Goldman and Deutsche Bank (DB) for selling "RMBS and CDO securities to clients without disclosing its own net short positions against the subprime market or its purchase of CDS contracts." Goldman, at the time, said it disagreed with most of the report. The firm defended itself again in an interview with BusinessWeek earlier this year. Write to Kerri Panchuk.