Goldman Sachs (GS) is asking the U.S. Supreme Court to overturn a lower-court decision involving securities backed by residential mortgages the company says would cost financial firms tens of billions of dollars.
Goldman has asked the court to toss out a ruling in September by the U.S. Court of Appeals for the 2nd Circuit that permits the NECA-IBEW Health & Welfare Fund, a pension fund for electrical workers, to sue Goldman for allegedly misleading investors about mortgage-backed securities the fund itself did not own.
The 2nd Circuit's decision conflicts with a ruling last year by the 1st Circuit, Goldman argues.
The case arose out of NECA's purchase in 2007 and 2008 of securities from two of 17 trusts Goldman offered. The fund purchased $390,000 worth of securities from one trust and $50,000 from another, according to Goldman's appeal.
In 2008, NECA filed a suit on behalf of buyers of securities from all 17 trusts. It contended Goldman mislead investors about the underwriting and appraisal standards used by the banks that originated the loans backing the trusts and omitted from securities filings information about the banks' lending practices.
A trial court dismissed NECA's claims involving securities from the 15 trusts it did not do business with, but the 2nd Circuit later decided that NECA could bring a class action on behalf of investors in the other offerings. The 2nd Circuit decision clashes with one made in 2011 by the 1st Circuit, which ruled in a separate case that MBS investors may not sue an issuer over securities they did not purchase.
"The stakes implicated by the 2nd Circuit's new and expansive standard for class standing are difficult to overstate," Theodore Olson, a former U.S. solicitor general who represents Goldman, wrote in a brief filed Oct. 26. "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."
Whether NECA can bring the suit "does not turn on" whether NECA would be able to seek recovery for itself, Judge Barrington Parker wrote for the 2nd Circuit in its Sept. 6 opinion. "NECA's claims raise a sufficiently similar set of concerns" to permit it represent securities holders from the other offerings.
Joseph Daley, an attorney for NECA in the case, declined to comment. It has until Dec. 3 to respond to Goldman's appeal, which was first reported by Reuters.
On Friday, JPMorgan Chase (JPM) asked the U.S. District Court in Manhattan to refrain from ruling in another case involving similar claims brought by the Forth Worth Employees' Retirement Fund until the Supreme Court rules on Goldman's appeal. "Given the circuit split and the novelty of the 2nd Circuit's 'class-standing' holding, there is a significant possibility that the Supreme Court" will seek "to resolve this important question," lawyers for JPMorgan wrote in court papers.