On September 8, 2015, Judge Victor Marrero of the Southern District of New York granted Goldman, Sachs’ motion for summary judgment, dismissing all claims against the firm. In 2006 and early 2007, Plaintiffs had purchased collateralized debt obligations (“CDOs”) structured by Goldman that were backed by residential mortgage backed securities (“RMBS”). After the CDOs lost value in the housing crisis and the recession, Plaintiffs brought a class action alleging that Goldman knew the CDOs did not have a realistic chance of being profitable at the time it structured them and that Goldman did not adequately disclose those beliefs.
Plaintiffs’ Expert claimed that Goldman structured the CDOs to hedge its subprime position and that this implied that Goldman could not have reasonably believed that the CDOs would likely be profitable for purchasers. Plaintiffs also alleged that Goldman selected weak RMBS as collateral for the CDOs.
Counsel for Goldman retained Compass Lexecon Senior Consultant Bradford Cornell who submitted an expert report and was deposed. Professor Cornell opined that the mere fact that the CDOs helped Goldman hedge its subprime risk does not imply Goldman believed the CDOs would not be profitable. He explained that hedging can be beneficial even if one has no more information than the rest of the market because it can reduce the risk of a cash shortfall and that hedging is a pervasive practice among firms. Professor Cornell also rebutted claims that Goldman selected weak RMBS as collateral for the CDOs, showing that the performance of the CDOs and the RMBS backing them was in line with similar investments.
Judge Marrero found that Plaintiffs did not point to any evidence, beyond mere speculation, sufficient to demonstrate that Defendants were aware of any singularly prohibitive risks which they failed to disclose. Goldman Sachs was successfully represented by Richard Klapper, Theodore Edelman, Stephanie Wheeler, Michael Tomaino Jr., Christopher Dunne and others from Sullivan & Cromwell LLP. Professor Cornell was supported by Jerry Lumer, Peter Clayburgh, Elizabeth Wall, Laura Yergesheva, Erika Morris and others in Compass Lexecon’s Chicago and Pasadena offices.