(CN) - Goldman Sachs cannot dismiss Prudential's claims that it falsely represented more than $375 million in residential mortgage-backed securities in its offering materials, a federal judge ruled in New Jersey.
In September 2007, New Jersey-based Prudential Insurance and five investment subsidiaries held about $13.5 billion in residential mortgage-backed securities (RMBS) and $241.1 billion in total investments.
From 2004 to 2008, Goldman Sachs & Co. bought and pooled mortgage loans and underwrote and sold more than $375 million worth of RMBS to Prudential, according to U.S. District Judge Susan Wigenton's history of the case.
In 2006 and 2007, Goldman Sachs created and underwrote 93 RMBS and 27 mortgage-related collateralized debt obligations, totaling about $100 billion.
In August 2012, Prudential demanded $270 million from Goldman Sachs, $183 million from Nomura Securities, and $343 million from RBS Financial Products fka Greenwich Capital, in separate complaints involving residential mortgage-backed securities.
In those complaints, in Essex County Court, Prudential claimed that Goldman Sachs' offering materials "did not reflect what Goldman Sachs knew regarding the true characteristics of Prudential's investments."
Goldman Sachs materially misrepresented underwriting standards and practices, due diligence, owner-occupancy, appraisal processes, loan-to-value ratios, assignments to the trusts, credit ratings, underwriting exceptions, and degree of risk, according to the amended complaint.
The case was removed to Federal Court, and Prudential amended its complaint, alleging common law aiding and abetting and equitable fraud; negligent misrepresentation; and New Jersey RICO violations. It sought rescission and damages.
Goldman sought dismissal in December, but Wigenton denied the motion last week, finding that Prudential sufficiently pled its fraud and RICO claims.
"First, plaintiffs allege several specific statements relating to defendants' alleged material misrepresentations," Wigenton wrote. "For example, plaintiffs contend that defendants abandoned their underwriting guidelines despite representing to investors that due diligence was conducted on the mortgage originators and loan underwriting guidelines before purchasing the loans for securitization. Additionally, plaintiffs provided detailed factual allegations in their amended complaint relating to defendants' misrepresentations of owner-occupancy statistics, [loan-to-value] LTV and [combined loan-to-value] CLTV rations, and transfer of title. Based on plaintiffs' own analysis of the mortgage loans which revealed misrepresentations by 'large margins,' plaintiffs contend that 'it is impossible to believe Goldman could have conducted this due diligence on the mortgage loans in the pools without concluding that a very high percentage of the mortgage loans in the pools did not comply with the underwriting standards disclosed in the offering materials.' Plaintiffs also extensively allege reliance on defendants' 'representations and assurances regarding the quality of the mortgage collateral underlying the certificates' and subsequent damages. Accordingly, the court finds that plaintiffs adequately pled a cause of action for fraud in its amended complaint."
Goldman owed a duty of care to Prudential, as it allegedly "made representations and assurances for plaintiffs' benefit and guidance knowing that plaintiffs would rely on the information," Wigenton wrote.
She deferred ruling on whether New Jersey or New York law applies to the case.
"In order to appropriately weigh each state's contacts in the context of this case, this court will benefit from acquiring further details regarding - for instance - where the alleged misrepresentations were made, where the alleged misrepresentations were relied on, defendants' actions outside New York, plaintiffs' actions outside New Jersey, and locations of meetings and/or transactions among the parties," Wigenton wrote. "Thus, this court will defer its choice-of-law decision until the parties present a full factual record."
Read the Top 8
Sign up for the Top 8, a roundup of the day's top stories delivered directly to your inbox Monday through Friday.