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Police and Fire Retirement System of City of Detroit v. Goldman, Sachs & Co.

United States District Court, S.D. New York

March 27, 2014

THE POLICE AND FIRE RETIREMENT SYSTEM OF THE CITY OF DETROIT, Individually and on Behalf of All Others Similarly Situated, Plaintiff,

Lawrence P. Kolker, Esq., Michael Liskow, Esq., WOLF HALDENSTEIN ADLER FREEMAN & HERZ LLP, New York, New York, Attorneys for Plaintiff.

Joseph C. Kohn, Esq., Denis F. Sheils, Esq., William E. Hoese, Esq., Barbara L. Moyer, Esq., KOHN, SWIFT & GRAF, PC, Philadelphia, Pennsylvania, Attorneys for Plaintiff.

Richard H. Klapper, Esq., Theodore Edelman, Esq., Michael T. Tomaino, Jr., Esq., Matthew A. Peller, Esq., D. Andrew Pietro, Esq., SULLIVAN & CROMWELL LLP, New York, New York, Attorneys for Defendants.



The Police and Fire Retirement System of the City of Detroit ("PFRS") sues Goldman, Sachs & Co. ("GS"), Goldman Sachs Mortgage Co. ("GSMC"), GS Mortgage Securities Corp ("GSM"), and three individuals (collectively, "Defendants") for violations of Sections 11 and 15 of the Securities Act of 1933. Defendants move to dismiss the complaint on the grounds that it fails to plead economic loss, fails to allege any actionable misrepresentations, and is barred by the applicable statute of limitations. For the reasons that follow, that motion is denied, except with respect to PFRS's claim that the offering documents misled investors as to the rating agencies' opinions. PFRS also seeks leave to amend its complaint to add allegations regarding two additional trusts securitized by GSM. That motion is denied as futile.


PFRS alleges as follows: On June 15, 2007, PFRS purchased Mortgage-Backed Certificates, Class 6A-1, from the GSR Mortgage Loan Trust 2007-4F (the "Trust") at a face value of $1, 800, 000.00. GS served as an underwriter in the sale of the certificates. GSMC, a subsidiary of GS, purchased the loans underlying the certificates from a variety of originators and sponsored the offerings. GSM, a subsidiary of GSMC, securitized the mortgages as the depositor of the certificates. GSM issued over $790 million worth of certificates pursuant to the offering documents through the Trust. The loans are divided into two groups. Loan Group 1 had an aggregate scheduled principal balance of $707, 936, 373, and Loan Group 2 had an aggregate scheduled principal balance of $82, 164, 370. The pool of loans underlying PFRSs' certificates was "Collateral Group 6." 80.6% of the loans in that group were originated by Countrywide Home Loans Servicing, LP ("Countrywide"). Other loan originators for the Trust as a whole included Washington Mutual Bank, Goldman Sachs Mortgage Conduit Program, SunTrust Mortgage Inc., and American Mortgage Network. In mid-2009 the certificates were downgraded both by Fitch and S&P from AAA to CCC (i.e. "junk") status, allegedly destroying their value.

On December 11, 2008, NECA-IBEW Health & Welfare Fund ("NECA") filed a complaint against the defendants asserting violations of Sections 11, 12(a)(2), and 15 of the '33 Act. These claims included the 2007-4F Trust at issue here. Counsel for NECA published a Private Securities Litigation Reform Act ("PSLRA") Notice in Business Wire on December 11, 2008, notifying purchasers of securities, including purchasers of the 2007-4F Trust, that a class action lawsuit had been filed on their behalf. I dismissed NECA's claims pertaining to the 2007-4F Trust on January 28, 2010 for lack of standing. On March 31, 2010, NECA filed a third amended complaint that no longer asserted claims regarding the Trust. As its claims were no longer covered by the proposed class action, PFRS moved to intervene in the NECA action on April 26, 2010. I denied the motion on May 27, 2010. PFRS filed this action on June 3, 2010.

PFRS's complaint has been dismissed twice before with leave to amend, largely on the basis that PFRS had failed to allege that defendants' alleged misrepresentations caused injury to PFRS. Since that time, however, the Second Circuit has issued an opinion in NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co. , 693 F.3d 145 (2d Cir. 2012), cert. denied, 133 S.Ct. 1624 (2013). That opinion has significantly changed the landscape of the pleading standards for loss causation and is discussed below.


I. Pleading Economic Loss

The absence of loss causation is an affirmative defense, and lack of loss causation is therefore generally "unavailing as a means of defeating a motion to dismiss pursuant to Rule 12(b)(6)." In re Morgan Stanley Info. Fund Sec. Litig. , 592 F.3d 347, 359 n.7 (2d Cir. 2010).

PFRS now makes the following loss allegations:

1. It purchased its certificates (face value of $1.8 million) for $1, 785, 337.50 on June 15, 2007.
2. PFRS sold the certificates on October 5, 2009, for a (post-adjustment) price of $943, 398.37.
3. The "book value" at that time was $1, 109, 275.41.
4. Thus, the difference between the book value and adjusted sale price constitutes its damages of $165, 877.05.

The Second Circuit concluded in NECA that "it is not just plausible - but obvious - that mortgage-backed securities... would suffer a decline in value as a result of (1) ratings downgrades and (2) less certain future cash flows" even if the securities did not miss an interest payment. 693 F.3d at 166. The court also concluded that the possibility that a secondary market for the certificates might not exist was irrelevant because, inter alia, that risk was a "liquidity risk" rather than the "credit risk" that led to the alleged loses. Id . at 167. The court ultimately found allegations that "a sale on the date the first lawsuit was filed would have resulted in a loss of at least 55 to 65 cents on each dollar amount purchased" sufficient to allege injury. Id . at 155.

After NECA, the fact that PFRS (1) received payments throughout the life of the certificates, and (2) was arguably aware of the risk that there would not be a secondary market for its certificates, is immaterial. Defendants attempt to distinguish NECA by arguing that the PFRS complaint "does not adequately plead a decline in value as a result of any alleged misrepresentations, " and does not adequately define "book value." However PFRS's loss allegations are more detailed than NECA's, which pass muster under the governing case law. Under NECA, PFRS has alleged a plausible injury.

Defendants also argue that PFRS has standing to bring claims only on behalf of plaintiffs who purchased certificates for the same tranche that it did. However, Defendants concede, as they must, that this argument is precluded by NECA's holdings on "class standing" and ...

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