A financial fraud lawsuit has been filed against Goldman Sachs over its Hudson Mezzanine securities, claiming that the company created collateralized debt obligation (CDO) securities that were doomed to fail so that it could profit from short positions it had taken on the funds.
The Goldman Sachs class action lawsuit (pdf) was filed on September 30 in the U.S. District Court for the Southern District of New York by Dodona I, LLC. The lawsuit names Goldman Sachs, Hudson Mezzanine Funding, Corp., Peter L. Ostrem and Darryl K. Herrick as defendants. The two men were vice presidents in Goldman’s structured products CDO group and helped manage, structure and sell the CDOs, the lawsuit claims.
According to the complaint, the two Hudson Mezzanine collateralized debt obligation securities, known as the Hudson 1 and 2 CDOs, constituted financial fraud and relied heavily on subprime mortgage-backed securities. The lawsuit against Goldman Sachs claims that it sold the securities to investors under the expectation that the securities would fail, and had set itself up to profit from the failure. The two securities were downgraded steadily in value from 2007 through 2008 as the subprime mortgage market collapsed.
Goldman Sachs is under investigation by the U.S. Department of Justice (DOJ) and the U.K. Financial Services Authority over similar claims regarding its Abacus CDOs, the lawsuit claims. It faces a class action lawsuit over those CDOs as well. In July, the company settled a fraud lawsuit by the U.S. Security Exchange Commission (SEC) over the Abacus CDOs for $550 million and agreed to make company reforms on how it offered mortgage-backed securities in the future.
The Hudson CDO class action lawsuit is seeking to represent anyone who invested in the CDOs from their inception until September 30, 2010. The lawsuit accuses the defendants of seven counts of financial fraud and seeks unspecified compensatory, punitive damages and court costs for all investors who suffered financial loss.