Liberty Mutual Insurance Co. and several of its subsidiaries have filed suit against investment banker Goldman, Sachs & Co. for “making materially misleading statements and omissions” in a preferred stock offering of mortgage lender Freddie Mac in November 2007. The insurers invested $37.5 million in the Series Z offering of Freddie Mac (Federal Home Loan Mortgage Corp.) shares backed by subprime mortgages and underwritten by Goldman. In the suit, filed in U.S. District Court in Massachusetts, the insurers allege if they had been informed of the “true state” of Freddie Mac’s capitalization, they would never have purchased the Series Z preferred shares. They say as a result of Goldman’s “fraudulent conduct,” their more than $37 million in investments are now “virtually worthless.”
Their Complaint alleges the insurers have suffered “huge losses” on the shares of stock they have sold, as well as on the shares of stock they still hold. They are asking treble damages and want a jury to hear their claims. The Plaintiffs include Liberty Mutual and its subsidiaries Safeco, Employers of Wausau, Peerless and Liberty Life. According to Insurance Journal, Goldman Sachs says it will fight the suit.
The Complaint alleges that Goldman’s actions in underwriting the Series Z offering were “part of a calculated pattern of deception in which Goldman not only profited from the collapse of the mortgage market, but also magnified risks in the market by selling high risk, poor quality mortgage products to investors around the world.” The Complaint further alleges that Goldman sold investors poor quality investments and placed its own financial interests before that of its clients.
As you may recall, Freddie Mac began getting into trouble around 2006 when homeowners began defaulting on subprime mortgages in increasing numbers. Freddie Mac raised almost $6 billion in the November 2007 offering, according to the Complaint. But by 2008 Freddie Mac had deteriorated to the point where it had to be rescued by the federal government. Preferred stock investors like Liberty Mutual then suffered losses because the government issued new preferred shares that were senior to the preferred stock they held.
While it was marketing and selling Freddie Mac securities, Goldman had taken huge net short positions on other securities backed by subprime residential mortgages that generated $3.7 billion in profits for the firm in 2007 alone, according to allegations in the Complaint. Before others became fully aware of the risk, it’s alleged that Goldman also took actions to transfer the risk of its own subprime mortgage inventory to the Plaintiffs. The Complaint refers to an April 2011 investigation report by the U.S. Senate.
About a year ago, Liberty Mutual sued Goldman over losses on the $62.5 million of preferred stock of the other government-sponsored mortgage player, Fannie Mae, that it bought in late 2007 through offerings underwritten by Goldman. While I have no problem with Liberty Mutual filing a lawsuit alleging fraudulent conduct on the part of other companies, I do wonder if the proponents of so-called “tort reform” consider Liberty Mutual’s lawsuit to be frivolous.
Source: Insurance Journal
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