Judge dismisses Goldman shareholder suit

Goldman Sachs has scored its third legal victory in a week after a New York judge dismissed a law suit filed by shareholders against the bank’s top management.

Senior staff including Lloyd Blankfein, chief executive, Gary Cohn, president, and David Viniar, chief financial officer, were named as defendants in the so-called “shareholder derivative suit”, along with former director Rajat Gupta and Larry Litton, the ex-president of Goldman’s old mortgage servicing business.

Shareholder derivative suits allow investors in a company to sue officers and directors, typically for breach of fiduciary duty. This particular law suit, filed by shareholders Michael Brautigam and the Retirement Relief System of the City of Birmingham, Alabama, listed a host of alleged improprieties by Goldman, including that the bank knowingly sold toxic mortgage-backed securities before the financial crisis.

US district judge William Pauley granted a motion to dismiss on Tuesday.

The dismissal follows two other legal victories won by the investment bank in recent days. Early last week, the Securities and Exchange Commission dropped an investigation into a $1.3bn subprime mortgage deal put together by Goldman at the height of the mortgage boom. Then on Thursday the Department of Justice said that it would not charge Goldman or any of its employees, following a high-profile investigation of the bank’s many pre-financial crisis mortgage deals.

The trio of legal wins marks an unusual reversal of fortunes for the company which has been haunted by a series of scandals since late 2008. Analysts say the end of the more than year-long DoJ probe helped relieve pressure on Mr Blankfein, who headed the bank throughout the crisis.

However, the bank said in a regulatory filing last week that it had raised its estimate of the amount of money it might lose from legal proceedings from $2.7bn to $3.4bn.

The $700m increase was due to at least three new law suits related to residential mortgage-backed securities created by the bank. Investors in such deals are believed to be rushing to file the suits before statute of limitations deadlines are reached.

The most recently dismissed law suit claimed that officers had breached their fiduciary duty to shareholders by opting to repay a government bailout programme early. Repaying loans from the Troubled Asset Relief Programme, known as Tarp, allowed executives to avoid a review of their pay and bonuses by the “Office of the Special Master for Tarp Executive Compensation”, the law suit said.

The suit also alleged that senior executives knew that employees of the Litton mortgaging servicing business, which has since been sold, were fraudulently signing off on foreclosure documents – a practice known as “robosigning” that eventually led to a settlement between Goldman and its regulators.

The shareholders alleged that executives “face a substantial likelihood of liability because they allowed Goldman to issue false and misleading representations concerning the characteristics of loans underlying its [residential mortgage-backed securities]”, the judge wrote in his dismissal. “This allegation is insufficient because plaintiffs do not identify the statements that they claim were misleading.”

A spokesman for Goldman Sachs declined to comment.

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