The U.S. Supreme Court punted on a chance to hear a case that could have a significant impact on the scope and size of residential mortgage-backed securities cases in the Second Circuit.
A panel of Second Circuit judges held an institutional investor can claim standing to sue Goldman Sachs (GS) over mortgage-backed securities transactions even if some of those claims relate to offerings that parties—other than the plaintiff—were involved in.
The case involves allegations made on behalf of () in which the institutional investor claimed Goldman Sachs made material misrepresentations and omissions in offerings of mortgage-backed securities, leading to losses on those securities later on.
The Second Circuit case became controversial when the court held the fund could by law “assert, on behalf of a putative class of plaintiffs, claims that it lacks standing to assert by itself.”
Essentially, NECA was able to sue Goldman Sachs for alleged misrepresentations the firm made about securities tied to offerings that NECA itself did not acquire. The decision conflicted with the First Circuit’s ruling in another case, sending Goldman Sachs scrambling for clarity.
However, the Supreme Court’s denial means the conflict between jurisdictions still lingers on, and it creates additional liabilities if RMBS investors can essentially pull in tranches of deals that they were not individually involved with to create a larger case in connection with their own RMBS claims.
Goldman in its petition to the Supreme Court stated the ‘perceived risk’ that stems from the Second Circuit’s decision for all RMBS defendants is great.
“In the context of mortgage-backed securities litigation in which this case arises, the decision will effectively increase by tens of billions of dollars the potential liability that financial institutions face in this and similar class actions,” Goldman wrote in its petition for Supreme Court review.
“Moreover, the new standard threatens to expand the scope of class actions in many other areas of the law.”