Goldman Sachs Group Inc must face a lawsuit in which Prudential Financial Inc accused the Wall Street bank of defrauding it into buying more than $375 million of residential mortgage-backed securities it knew were unsafe.
U.S. District Judge Susan Wigenton in Prudential's hometown of Newark, New Jersey said the second-largest U.S. life insurer adequately alleged Goldman's deception about the quality of certificates that several Prudential affiliates had bought from 16 securitizations between February 2004 and December 2008.
She rejected Goldman's argument that Prudential, being "among the most highly sophisticated participants in the RMBS market and part of a conglomerate long immersed in the nation's housing industry," sued in a pique of "buyer's remorse," and relied too much on unsupported assumptions.
Like many other U.S. commercial and investment banks, Goldman has been the target of many lawsuits over its packaging and sale of risky mortgage-linked securities, whose rapid decline in value was a cause of the 2008 financial crisis.
Bank defendants have often argued that plaintiffs such as Prudential knew enough to understand what they were buying.
Wigenton nonetheless allowed Prudential to pursue accusations that Goldman committed fraud, negligent misrepresentation and racketeering violations.
Prudential's 188-page complaint was originally filed in August 2012, and sought to recover the insurer's losses or rescind the certificate purchases.
It drew in part on Congressional and other investigations over Goldman's role in the financial crisis.
"To use Goldman's own words, the certificates it sold to Prudential were, 'junk,' 'dogs,' 'crap,' and 'lemons,'" the insurer said, citing documents revealed in these probes.
In her decision, Wigenton said Prudential had adequately alleged that Goldman had abandoned its underwriting guidelines, and could not have done proper due diligence without finding a "very high percentage" of the underlying loans did not comply.
"The court finds that plaintiffs adequately pled a cause of action for fraud," Wigenton wrote.
Goldman spokesman Michael DuVally declined to comment. Prudential spokesman Scot Hoffman declined to comment.
The case is Prudential Insurance Co of America et al v. Goldman Sachs & Co et al, U.S. District Court, District of New Jersey, No. 12-06590.
(Reporting by Jonathan Stempel in New York; Editing by Bernard Orr)