Liberty Mutual Sues Goldman Over Freddie Mac Investment Losses

By | July 8, 2011

Boston-based Liberty Mutual Insurance Co. and several of its subsidiaries have sued 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, according to the filing made in U.S. District Court in Massachusetts.

The insurers say that 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 that as a result of what they charge is Goldman’s “fraudulent conduct,” their more than $37 million in investments are “virtually worthless.”

Their complaint says they have suffered “huge losses” on the shares of stock they have sold, as well as on the shares of stock that they still hold.

They are asking treble damages and a jury trial.

The plaintiffs include Liberty Mutual and its subsidiaries Safeco, Employers of Wausau, Peerless and Liberty Life.

Goldman Sachs told Insurance Journal it will fight the suit.

“The suit is without merit and we will contest it vigorously,” said spokesman Michael DuVally.

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 alleges that Goldman sold investors poor quality investments and placed its own financial interests before its clients’.

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 the complaint.

Also, before others became fully aware of the risk Goldman also took actions to transfer the risk of its own subprime mortgage inventory to them, the complaint continues, citing an April 2011 investigation report by the U.S. Senate.

One 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.

The latest case is Liberty Mutual Insurance Co. v. Goldman, Sachs & Co., 11-11194, U.S. District Court, District of Massachusetts.

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