Goldman Sachs and Davis Square Funding VI (CDO)

It seems passing strange that the courts seem to ignore fraud in securities ratings and fraud in executive responsibility for financial statements under Sarbanes-Oxley when they are asked to make decisions about whether or not Goldman is culpable for the investments they sold before 2008.  Goldman can always say that they did not know that the housing market would implode but, nevertheless, they contributed mightily to its collapse by securitizing sub-prime mortgages and selling them when they knew they would become worth less.

Then, of course, Goldman bet against the mortgage market and made billions that way as well as with high fees on bad products.  That old canard about sophisticated investors who should know what they have bought is always dragged out as Goldman's best excuse for not telling clients important details about its products.

Update1 - Goldman, Landesbank argue CDOs in US appeals court 
By Grant McCool - Reuters

(Reuters) - A U.S. appeals court was asked on Friday to decide whether Goldman Sachs Group Inc and TCW Asset Management Co should have foreseen the housing market implosion that caused a $37 million loss for German state-owned Landesbank Baden-Wurttemberg.

A three-judge panel on Friday did not make an immediate ruling on a trial judge's decision last September to dismiss the German bank's lawsuit claiming fraud against Goldman and TCW, an investment advisor.

The lawsuit was brought over a collateralized debt obligation (CDO) named Davis Square Funding VI, which was managed and marketed by Goldman and TCW at the height of the housing bubble when profits were potentially lucrative. The lawsuit was filed in October 2010, about four years after Davis Square closed.

It is one of the few cases to reach the appellate court level in which a sophisticated investor has accused a bank of profiting unjustly by being negligent in marketing and selling the product. Landesbank also accused Goldman of betting against its own derivative product that was riddled with risky residential mortgage-backed securities.

In dismissing the case, U.S. District Judge William Pauley in New York had said the allegations against Goldman and TCW were "sparse and lack particulars" and speculated on events occurring long after Davis Square closed.

Judges on the 2nd U.S. Circuit Court of Appeals also zeroed in on whether Landesbank should have more carefully scrutinized what it was buying.

"What does the record show about your client's diligence in the housing market during this period?" Judge Susan Carney asked Landesbank lawyer Arthur Miller.

Miller responded that there was "no way of having equal information to Goldman," describing the investment bank as the "emperor" of financial institutions.

Miller told the panel that Goldman knew what information the ratings agencies and the top market regulator, the U.S. Securities and Exchange Commission, had about the quality of the underlying mortgages in the investment pool.

Read the entire article here