Goldman Sachs says insurer suffering 'buyer's remorse'

NEW YORK (Legal Newsline) - Attorneys for Goldman Sachs Group Inc. last week filed a motion to dismiss a lawsuit by Allstate Insurance Co. over residential mortgage-backed securities the bank issued.

The insurer filed its complaint against Goldman Sachs in New York State Supreme Court on Aug. 15. The bank filed its motion to dismiss the suit in the court on Friday.

According to the bank, Allstate filed the lawsuit and seven others like it against various issuers and underwriters of residential mortgage-backed securities, asserting fraud and negligence claims arising from its "substantial" investments.

"Despite its financial sophistication and expertise (including in the housing market, where it is a leading insurer), Allstate now suffers from buyer's remorse and has sued the counterparties with which it traded at arm's length, claiming in separate actions that each of the eight sellers of RMBS misled it as to characteristics of the securities," Goldman Sachs wrote in its 25-page motion.

Allstate's complaint alleged that the certificates it had purchased received investment-grade ratings by independent rating agencies.

However, it argued that the securities were even riskier than described because of alleged "deficiencies" in disclosures.

Goldman Sachs, in response, argues that the insurer's complaint fails to allege facts about the five residential mortgage-backed securities at issue and instead relies on allegations about the industry and offerings having "nothing to do" with the case.

The court, the bank says, should dismiss Allstate's complaint for six reasons.

First, it says its claims are time-barred under the Illinois Securities Law's three-year statute of limitations.

Second, Allstate has not pleaded an actionable misstatement or omission, the bank says.

"Allstate ignores the specific disclosures in the offering documents that underscored that many of the loans underlying the certificates were issued pursuant to alternative -- and inherently risky -- loan programs under which originators issued loans with limited, or no, verification of information provided by borrowers," Goldman Sachs wrote.

"Allstate relies instead on hindsight pleading by trying to bootstrap loan delinquency rates and ratings downgrades long after the offerings into a misstatement in the 2006 offering documents describing loans originated even earlier."

Third, Goldman Sachs says the insurer was required to plead reasonable reliance and it has not done so.

"Allstate is a paradigmatic sophisticated investor with almost $8 billion invested in RMBS, and it had full access to the information, including loan-level data, necessary to make its own investment decisions," the bank noted.

Fourth, certain allegations by Allstate that the bank "must have known" of some inaccuracy in the offering materials in 2006 because its investment ultimately did not perform as well as it had hoped amount to speculation, Goldman Sachs says.

Such "hindsight pleading" is insufficient, the bank says.

It says Allstate also has failed to plead loss causation.

Nowhere in its complaint does it allege how the bank's "misstatements" and "omissions" caused Allstate's investment losses, Goldman Sachs says.

"Indeed, Allstate has publicly attributed the poor performance of its RMBS portfolio not to anything defendants did or said, but to the overriding market factors that swept away countless investments in their tide, stating that its alleged losses were largely caused by 'macroeconomic conditions and credit market deterioration, including the impact of real estate valuations,'" the bank wrote.

Finally, the bank says Allstate hasn't stated a claim for negligent misrepresentation because it has pleaded neither a special relationship of trust and confidence nor special expertise on the part of the bank.

"Allstate is a sophisticated investor that engaged in arm's length transactions with defendants, who expressly informed Allstate that it should seek the advice of an outside investment adviser if it could not assess the certificates on its own," Goldman Sachs wrote.

In addition to Goldman Sachs, Allstate has sued JPMorgan Chase & Co., Credit Suisse Group AG, Bank of America Corp.'s Merrill Lynch unit, Citigroup Inc. and Deutsche Bank AG over the residential mortgage-backed securities.

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.