On Tuesday, Harold Baer, the U.S. District Judge in Manhattan, received papers for approval of The Goldman Sachs Group Inc.’s (GS) $26.6 million settlement with investors related to the Public Employees' Retirement System of Mississippi pension fund. The settlement was made to compensate investors for misleading them regarding the risks associated with mortgage-backed securities worth $698 million.
In February 2012, the federal judge in Manhattan, Harold Baer, had ordered Goldman to deal with the securities class-action lawsuit filed by the pension fund, rejecting all the arguments the latter had in its defense.
Background
Investors, led by the Public Employees' Retirement System of Mississippi, filed a lawsuit against Goldman in the federal court of Manhattan, over GSAMP Trust 2006-S2 securities in 2009. The securities, which were offered to the investors, were backed by second-lien home loans. These loans were purchased from California-based subprime lender New Century Financial Corp., which was bankrupt in 2007.
The complaint accused Goldman of having deceptively sold the sub-prime mortgage-linked securities that gradually failed. It also claimed that the company misrepresented the value of instrument by providing materially misleading statements.
Moreover, the Mississippi pension fund alleges that Goldman failed to expose New Century’s ignorance in meeting its own underwriting standards and the company’s use of overstated appraisals. Goldman has been blamed for overlooking these issues while buying loans from New Century and selling them as securities to investors. Eventually, the market exhibited a downtrend, resulting in huge losses for the common investors.
Similar Settlements
Most recently, in May 2012, Bank of America Corporation (BAC) received approval for a $315 million settlement with investors related to the Public Employees' Retirement System of Mississippi pension fund. Though BofA did not admit any wrongdoing, Merrill Lynch, purchased by the investment bank in 2009, emphasized that losses faced by investors were attributable to the downturn in the economy and housing bubble.
Among other banks, Citigroup Inc. (C), JPMorgan Chase & Co. (JPM), HSBC Holdings Plc (HBC) and M&T Bank Corp. (MTB) have also been accused of misrepresenting documents related to mortgage-backed securities and other losses over the period.
Our Viewpoint
With the settlement of the lawsuits, Goldman plans to move forward with its business strategies after attempting to end issues related to the financial crisis. Moreover, pending lawsuits can further trigger financial hassles while tarnishing the company’s image.
Therefore, it is in the interest of the company to resolve such matters at the earliest. Also, the settlement has ensured justice for investors.
Goldman currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term Neutral rating on the stock.
BANK OF AMER CP (BAC): Free Stock Analysis Report
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GOLDMAN SACHS (GS): Free Stock Analysis Report
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M&T BANK CORP (MTB): Free Stock Analysis Report
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