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Public Employees' Retirement System of Mississippi, Individually and On Behalf of All Others Similarly Situated v. Goldman Sachs Group

January 12, 2011


The opinion of the court was delivered by: Hon. Harold Baer, Jr., District Judge:


Lead Plaintiff Public Employees' Retirement System of Mississippi ("MISSPers" or "Plaintiff") brings claims charging the defendants with violations of sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. §§ 77k(a), 77l(a)(2), 77o (2010). These sections, the Plaintiff opines, were violated as a consequence of alleged omissions and misstatements in a registration statement, prospectuses, and prospectus supplements filed with the SEC in connection with three offerings of mortgage pass-through certificates. Pass-through certificates are securities that entitle the holder to income payments from pools of mortgage loans or mortgage backed-securities.

Plaintiff brings suit against essentially two groups of defendants: First, the Goldman Sachs Defendants, who are alleged to have structured, issued, and sold the pass-through certificates challenged in this litigation (hereinafter, the "Certificates"); and second, the Rating Agency Defendants, who provided credit ratings for the Certificates and also allegedly acted as underwriters based on their role in the structuring of the Certificates. For the reasons that follow, the claims against the Rating Agency Defendants are dismissed because they cannot be held liable under this set of facts as "underwriters." Claims against the Goldman Sachs Defendants related to offerings in which Plaintiff did not purchase are dismissed for lack of standing. Plaintiff's section 11 and section 12(a)(2) claims related to misstatements and nondisclosure of mortgage originators' disregard of loan underwriting guidelines may proceed as to the GSAMP 2006-S2 certificates, which Plaintiff did purchase, as may Plaintiff's section 15 claims against certain of the Goldman Sachs Defendants.



Lead Plaintiff MissPERS is a state government pension plan that serves nearly all non-federal public employees in the State of Mississippi. It provides benefits to over 75,000 retirees and will provide future benefits to over 250,000 current and former public employees. It purports to represent a class that "purchased or otherwise acquired mortgage pass-through certificates" which were registered or traceable to a single Registration Statement filed with the SEC. Second Am. Class Action Compl. ("SAC") ¶ 1, 11. Although the SAC alleges that the Registration Statement was filed on August 17, 2005, the Goldman Sachs Defendants assert that the challenged offerings were issued pursuant to Registration Statement filed on November 5, 2004 and amended on December 24, 2004, and a base prospectus dated November 17, 2005. See SAC ¶ 39; Rouse Decl. Ex. D. Between February 2, 2006 and March 28, 2006, Defendants filed prospectus supplements pursuant to which the challenged offerings were issued, each from a separate trust named in the SAC: The GSAA Home Equity Trust 2006-2, the GSAA Home Equity Trust 2006-3, and the GSAMP Trust 2006-S2.

The various defendants (collectively "Defendants") can be grouped into two sets. First, there are the "Goldman Sachs Defendants," made up of defendant corporate entities The Goldman Sachs Group, Inc. ("GS Group"), Goldman, Sachs & Co., ("Goldman Sachs"), Goldman Sachs Mortgage Company ("GSMC"), and GS Mortgage Securities Corp. ("GS Mortgage"), *fn2 who are alleged to have collectively securitized and issued the Certificates. The Goldman Sachs Defendants also include individual defendants ("Individual Defendants") Daniel L. Sparks, Mark Weiss, and Jonathan S. Sobel, who held senior positions at GS Mortgage and, simultaneously, at parent company Goldman Sachs. See SAC ¶¶ 20-23. The second group, the "Rating Agency Defendants," is made up of Moody's Investors Service, Inc. ("Moody's"), Fitch Inc. ("Fitch"), and McGraw-Hill Companies, Inc., of which Standard & Poor's Rating Service is a division (hereinafter "S&P") and, all of which are alleged to have acted as underwriters of the offerings. See SAC ¶¶ 16-18.

Mortgage Backed Pass-Through Certificates

Mortgage-backed pass through certificates are securities in which the holder's interest represents an equity interest in the "issuing trust." The pass-through certificates entitle the holder to income payments from pools of mortgage loans or, in certain cases, mortgage-backed securities ("MBS"). MBS are themselves created from mortgage loans, which are acquired, pooled together, and then sold to investors who acquire rights in the income flowing from the mortgage pools. See New Jersey Carpenters Vacation Fund v. Royal Bank of Scotland Group, PLC, 720 F.Supp.2d 254, 258 (S.D.N.Y. 2010). Although the structure and underlying collateral of the mortgage and MBS underlying various pass-through certificates may vary, the concept is the same. See SAC ¶ 24.

In general, to create pass-through certificates, a "depositor" creates an inventory of loans from a sponsor, who originated the loans or bought them from other loan originators. The depositor then transfers the acquired pool of loans to the issuing trust entity. In addition, the depositor must securitize the pool of loans so that rights to the profits from the inventory of loans can be sold to investors. The certificates may be divided into different risk levels known as "tranches," such that the risk of default on the underlying loans corresponds to a lower "tranche" of pass-through certificates. Senior tranches of certificates are generally rated as the best quality, while junior tranches, which are less insulated from risk but offer greater rewards, receive lower ratings. See SAC ¶¶ 24-27.

During the securitization process, the depositor works with underwriters and rating agencies to ensure that each tranche receives an appropriate rating at the time of the offering. To sell the pass-through certificates to investors, the issuing trust must return the certificates to the depositor, who, in turn, passes the certificates to one or more underwriters. The underwriters offer the certificates to investors in exchange for cash that will be forwarded to the depositor, minus any underwriting fee. Id.

Each pass-through certificate represents an equity interest in the issuing trust and the right to future payments of principal and interest on the underlying loans. These payments are collected by the loan servicer and distributed, though the issuing trust, to investors at regular intervals throughout the life of the loans. Mortgage pass through certificates are offered to the public pursuant to a registration statement, in accordance with the provisions of the Securities Act of 1933. See Id. ¶ 28.

The Goldman Sachs Securitizations

Plaintiff alleges that GS Mortgage, acting as depositor, coordinated with the Rating Agencies and underwriter Goldman Sachs, to sell over $2.6 billion in Certificates from three issuing trusts between February 2, 2006 and March 28, 2006. The sales were pursuant to a single Registration Statement filed August 17, 2005. GSMC acted as sponsor for all three issuing trusts at issue in the litigation, the GSAA 2006-2 Trust, GSAA 2006-3 Trust, and GSAMP 2006-S2 Trust. GSMC but did not originate the underlying mortgage loans; rather, it purchased loans from other originators, and pooled and conveyed the loans to the depositor, GS Mortgage. Id. ¶¶ 3, 13, 25-26. GS Mortgage then conveyed a loan pool to each of the three issuing trusts. Id. ¶¶ 14, 25, 26, 29. In exchange for the loan pool, each trust transferred pass-through certificates to depositor GS Mortgage, which sold the certificates in separate offerings to investors through the underwriter, Goldman Sachs. Id. ¶¶ 15, 27, 29. Although the allegations in the SAC relate to sales of Certificates from all three trusts, the only trust from which Plaintiff is alleged to have purchased Certificates is GSAMP 2006-S2. Id. ¶¶ 3, 11, 39-42, 176.

The SAC alleges that the Registration Statement, along with the Prospectus and Prospectus Supplements filed with the SEC (together, the "Offering Documents") set forth the underwriting standards of each loan originator from which GSMC bought mortgages. Since pass-through certificates are valued based on the ability of borrowers to repay the principal and interest on the underlying loans, information related to the underwriting standards is critical to the evaluation of whether to invest in certificates. See id. ¶ 32. According to the Offering Documents, the originators of the loans underlying the Certificates were required to assess borrower creditworthiness through an examination of borrower assets, credit history, and employment; however, Plaintiff contends that the originators systematically disregarded these standards, and as a consequence they misrepresented the value of the collateral underlying the Certificates and the potential returns on the Certificates themselves. Id. ¶¶ 30, 55, 59, 62, 68, 73, 79, 94, 97; 63, 69, 74, 80, 95, 98, 104. Plaintiff alleges that contrary to representations in the Offering Documents, the underlying loans were frequently based on inflated appraisals and understated loan-to-value ratios.*fn3 Id. ¶¶ 101, 106, 112-13, 115-19.

According to Plaintiff, the Rating Agency Defendants played a substantial role in the securitization process, by evaluating default and delinquency rates of the underlying mortgages. Id. ¶¶ 4, 46, 141. Furthermore, the SAC alleges that as a condition to the issuance of the Certificates, they were assigned a specific set of predetermined ratings, which were integral to the distribution of the certificates because it was only "investment-grade" securities that were sought by institutional investors. Id. ¶¶ 38, 44, 127, 132, 185. Plaintiff alleges that in order to facilitate the sale of the Certificates, the Ratings Agencies branded the vast majority of them with "AAA" ratings, categorizing them as "best quality" investment-grade securities. Plaintiff contends that these ratings were based on insufficient information and faulty assumptions concerning the number of underlying mortgages likely to default, and therefore, the Certificates were secured by assets that had a much greater risk profile than represented by the ratings.

Causes of Action

Plaintiff alleges that the Offering Documents for the Certificate offerings violated section 11 of the Securities Act, because GS Mortgage, Goldman Sachs, the Individual Defendants and the Rating Agency Defendants made misstatements and omissions in the Offering Documents. SAC ¶¶ 157-172. MissPERS further alleges that GS Mortgage and Goldman Sachs violated Section 12(a)(2) of the Securities Act because they "knew of, or in the exercise of reasonable care should have known of, the misstatements and omissions contained in the Prospectuses."

SAC ¶¶ 173-181. Finally, Plaintiff brings a cause of action pursuant to Section 15 of the Securities Act against GSMC, GS Group, the Individual Defendants, and the Rating Agency Defendants for "control person liability." CAC ¶¶ 182-187. As against GSMC, GS Group, and the Individual Defendants, Plaintiff alleges that their positions made them privy to the material facts concealed from Plaintiff and other class members. With respect to the Rating Agencies, the SAC alleges that they wielded substantial control over many parties to the securitization of the ...

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