A federal judge in Manhattan has ruled that a lawsuit against Goldman Sachs may proceed as a class action.
Over 150 plaintiffs — led by a the Public Employees’ Retirement System of Mississippi — allege that Goldman Sachs didn’t properly evaluate loans it bought from New Century Financial Corp. in 2005, which it then packaged into mortgage-backed securities in 2006.
The suit also alleges that New Century didn’t follow its own mortgage underwriting standards when making the loans, according to the decision issued Thursday by Judge Harold Baer, Jr., though the company is not named as a defendant in the suit. Goldman’s alleged negligence arises from its failure to properly vet the loans and the inaccurate information about the quality of the loans investors say they received as a result.
This decision paves the way for the case to move into discovery and possible trial.
“That’s what firms like Goldman get really nervous about,” said Andrew Stoltmann, a Chicago-based attorney who has been working for several years on behalf of individuals and funds that claim they were deceived into buying mortgage bonds that were marketed as safe. “The last thing you want is a class action lawyer sniffing through the documents that a bank or brokerage firm might have.”
Moreover, “other judges trying to decide motions relating Goldman Sachs might rely on similar analysis,” Stoltmann said.
Class action certification is often the most difficult hurdle for class action cases and is therefore a significant step for the plaintiffs. Goldman had argued that each investor should have to file individual lawsuits against the bank, but Judge Baer ruled against that motion.
A spokesman for Goldman Sachs declined to comment.
In 2010, the bank paid $550 million to settle charges filed by Securities and Exchange Commission over a mortgage debt investment the bank sold to investors.