Credit Rating Agency Claims Dismissed, But Other Goldman Sachs Subprime Securities Suit Claims Survive

Credit Rating Agency Claims Dismissed, But Other Goldman Sachs Subprime Securities Suit Claims Survive

In a January 12, 2010 opinion (here) in a subprime-related securities suit involving Goldman Sachs-issued mortgage pass-through certificates, Southern District of New York Judge Harold Baer, Jr. granted the rating agency defendants' motion to dismiss on the grounds that they are not "underwriters" under Section 11, but denied the Goldman Sachs defendants' motion to dismiss, at least as to the securities offerings in which the plaintiffs had actually purchased shares.

Although Judge Baer's closely follows other decisions in similar cases, it also diverges from other recent decisions in certain respects, including a recent decision in a separate case in the same courthouse involving other Goldman Sachs-issued mortgage pass through certificates.


Goldman Sachs and related entities sold over $2.6 billion in mortgage pass-through certificates in three offerings from three issuing trusts between February 2, 2006 and March 28, 2006. The credit rating agencies assigned AAA ratings or their equivalent to the certificates. The named plaintiff in the case purchased securities in only one of the three trusts.

The plaintiffs filed their initial securities class action complaint February 6, 2009. The plaintiffs alleged that the originators of the mortgages underlying the certificates had "systematically disregarded" their own underwriting standards in originating the mortgages, contrary to the representations about the originators' underwriting practices in the offering documents.

The defendants moved to dismiss.

The January 12 Opinion

The plaintiffs had named the credit rating agency as defendants and sought to hold them liable on the theory that, as a result of the involvement in structuring the securities, the credit rating agencies had acted as "underwriters" within the meaning of Section 11 of the Securities Act of 1933.

In rejecting this theory, Judge Baer observed that:

While the Rating Agency Defendants may have played a significant role in the ability of other defendants to market the securities at issue, and if we were writing on a clean slate, their liability might be presumed, the fact is we are not writing on a clean slate and, for the moment at least, the law insulates them from exposure under section 11 and they must be dismissed.

Judge Baer similarly had little trouble granting the defendants' motions to dismiss the plaintiffs' claims as to the two of the three securities offerings in which the plaintiffs had not purchased any securities. Referring to many other cases in which plaintiffs were held to lack standing under similar securities, Judge Baer said "I concur with these well reasoned and common-sense opinions that Plaintiff needs to show an injury connected with the offerings it challenges as misleading, and therefore Plaintiff's claims with regard to Certificates they did not purchase ...are dismissed for lack of standing."

However, Judge Baer rejected the Goldman defendants' bid to have the plaintiffs' remaining claims dismissed.

First, Judge Baer rejected the defendants' bid to have the claims dismissed on statute of limitations ground. Specifically, he rejected that defendants' contention that the plaintiffs had been put on ""inquiry notice" of possible misrepresentations more than a year before the plaintiffs filed their suit.

Judge Baer found that neither the December 2007 ratings downgrade of the securities nor generalized press coverage about problems with loan originators' underwriting practices were sufficient to put the plaintiffs on inquiry notice, because this information did not "directly relate" to the misrepresentations that the plaintiffs alleged in this lawsuit.

Read the article in its entirety at the D&O Diary, a blog by Kevin LaCroix.