Prudential Insurance can pursue its racketeering and fraud suit alleging Goldman, Sachs & Co. sold it more than $375 million in shaky mortgage-backed securities.
On Tuesday, U.S. District Judge Susan Wigenton denied Goldman’s motion to dismiss, finding Prudential had sufficiently pleaded its five claims.
Federal judges in other jurisdictions have also allowed suits by mortgage-backed securities buyers to proceed, at least in part, against companies such as J.P. Morgan, Bear Stearns, Morgan Stanley and Merrill Lynch.
Prudential itself was allowed to pursue analogous claims against Morgan Stanley by a New Jersey state court judge on March 15.
Wigenton ruled in The Prudential Insurance Co. of America v. Goldman, Sachs & Company, 12-cv-6590, a suit by Pru and four connected companies that was removed to federal court last Oct. 16 from Essex County Superior Court.
The 193-page complaint, with 379 pages of exhibits, asserted four common-law fraud claims: common-law fraud, aiding and abetting fraud, equitable fraud and negligent misrepresentation.
It asked for treble damages, legal fees and prejudgment interest.
Prudential alleges it bought securities from Goldman across 16 securitizations between Feb. 11, 2004, and Dec. 17, 2008.
Goldman supposedly knew the securities were "junk," "dogs," "crap" and "lemons," but induced Prudential and other "unsuspecting investors" to buy them.
Goldman allegedly did so by offering materials that were misleading about underwriting standards, due diligence, owner-occupancy rates, appraisal processes, loan-to-value ratios, assignments to trusts, credit ratings, risk and other factors.
Wigenton pointed out that Prudential provided analyses, statistical information, reports and examples of false or misleading statements in support of each alleged misrepresentation.
For example, its own loan-level analysis of owner-occupancy rates on the underlying mortgage loans allegedly demonstrated that the securities failed multiple tests and that a much higher percentage of borrowers than represented did not occupy the mortgaged properties.
The Goldman entities were allegedly involved in pooling and securitizing the underlying mortgages, transferring them to issuing trusts and dividing the risk of loss into different levels of investment, or "tranches," as well as underwriting the investments.
Although Goldman did not originate the mortgages, it was said to be in a unique position to access the underlying loan information and the originators’ practices and, thus, must have known the offering materials contained false and misleading statements.
Prudential contends that Goldman was made aware on an almost real-time basis that many loans failed to meet underwriting guidelines by Clayton Holdings, a due-diligence firm it hired to review loan files and report back to it.
Nevertheless, Goldman allegedly "waived" the defects and placed the problem mortgages into the pools of loans.
In allowing the New Jersey RICO claim, Wigenton found that Prudential sufficiently alleged that the Goldman defendants formed an enterprise that affected New Jersey trade or commerce and engaged in a pattern of racketeering based on predicate acts violating New Jersey’s securities, deceptive practices, theft-by-deception and falsified-records statutes.
She also found adequate pleading of a conspiracy by the Goldman defendants with each other and third parties to violate New Jersey’s RICO law.
Goldman had argued that a corporation cannot conspire with its own agents and employees. But Wigenton pointed out it was relying on case law construing the federal RICO statute, not New Jersey’s.
The racketeering claim could still be knocked out later if Wigenton determines that New York rather than New Jersey law applies, as Goldman contended.
The New York law, unlike New Jersey’s, does not provide for a private right of action, and if it did apply, "would effectively dispose of" Prudential’s claim, Wigenton pointed out.
Goldman had argued for New York law because all the defendants are based there, their materials were drafted there and disseminated from there, and Prudential had not identified any acts by them outside New York.
Prudential, based in Newark, took the position that New Jersey law should govern because that was where it received Goldman’s materials, relied on its representations and incurred losses.
Wigenton held off ruling on the choice-of-law issue on the racketeering and fraud claims, stating she did not have enough facts.
David Field of Lowenstein Sandler in Roseland, for Prudential, and A. Ross Pearlson of Wolff & Samson in West Orange, for Goldman, did not return calls.
Goldman moved to dismiss on Dec. 11, 2012, and while the motion was pending, Prudential repeatedly notified Wigenton of courts in other jurisdictions that were allowing suits to go forward.
One of them was the Feb. 13 decision by U.S. District Judge Rya Zobel of the District of Massachusetts, in Capital Ventures International v. J.P. Morgan Acquisition, 12-cv-10085, which alleged violations of the Massachusetts Uniform Securities Act due to misrepresentations over $143 million in securities.
Zobel threw out part of the suit but left most of it intact. Goldman argued that the case and others were not similar because they were not fraud actions, and thus did not require showing scienter and reliance.
The New Jersey case was Prudential Insurance Company of America v. Morgan Stanley, L-3080-12, decided by Essex County Superior Court Judge Paul Vichness.