Allstate sues Goldman Sachs over toxic investments

Allstate Corp. is suing Goldman Sachs Group Inc. claiming the broker fraudulently sold it more than $123 million in mortgage-backed securities in 2006 and 2007, before the housing market collapse sent the investments’ value plunging.

The insurer claims in a lawsuit filed in New York that the documents Goldman provided at the time “contained untrue statements and omitted material facts” about the mortgages underlying the investments.

“Goldman knew these types of securities were, to use Goldman’s own words, … ‘junk,’ ‘dogs,’ ‘crap’ and ‘lemons,'” according to the complaint.

Allstate’s complaint, filed Monday in New York State Supreme Court by subsidiary Allstate Insurance Co., says Goldman’s characterizations of the investments were “revealed to the public by the numerous governmental investigations into Goldman’s role in the market’s collapse.”

The lawsuit alleges Goldman violated state laws against fraud and negligent misrepresentation, and it seeks unspecified damages from Goldman and certain affiliates.

Goldman Sachs spokesman Michael DuVally declined to comment.

The lawsuit is the ninth that Allstate has filed since December over mortgages that were bundled together and sold to investors. The first was a complaint against Countrywide Financial Corp. over $700 million in mortgage-backed securities that Allstate purchased beginning in 2005. That complaint also targets Bank of America Corp., which bought the mortgage giant in 2008.

Defendants in more recent lawsuits filed by Allstate include Morgan Stanley and JPMorgan Chase & Co., Bank of America’s Merrill Lynch & Co. unit, and units of Citigroup Inc., Credit Suisse Group AG and Deutsche Bank AG.

The bursting of the housing bubble and the resulting shrinking of the value of mortgage-backed investments helped trigger the Great Recession that began in late 2007.

Allstate’s complaint against Goldman alleges that the New York-based bank claimed the mortgages backing the securities it sold were low-risk and followed strict underwriting criteria.

“In fact, Goldman knew that lenders had systematically abandoned the stated underwriting guidelines, producing loans without regard to the likelihood of repayment,” the complaint says.

Goldman paid $550 million last year to settle similar civil fraud charges brought by the Securities and Exchange Commission. That was the largest penalty against a Wall Street firm in SEC history. Goldman did not admit or deny wrongdoing.

The SEC accused Goldman of steering investors toward complex mortgage investments without acknowledging the securities had been crafted with input from a client that was betting they would fail.

In June, the Manhattan District Attorney’s office asked the bank for information on its activities leading up to the financial crisis.

Goldman’s role in selling mortgage-backed securities has been closely watched by lawmakers. A Senate report in April found that Goldman marketed four sets of complex mortgage securities to banks and other investors. The report concluded this was part of Goldman’s effort to shift risk from its balance sheet to those of investors.

Shares of Goldman Sachs fell $2.26, or 1.9 percent, to close Tuesday at $116.87.

Shares of Allstate, based in Northbrook, Ill., fell 36 cents, or 1.4 percent, to $25.67.

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