Dodona I, LLC v. Goldman, Sachs & Co.
847 F. Supp. 2d 624
S.D.N.Y.2012Background
- Dodona sues on behalf of a putative class over two Hudson CDOs (Hudson 1 and Hudson 2) involving Goldman Sachs entities and former Goldman personnel Ostrem and Herrick; claims include §10(b)/Rule 10b-5, §20(a), common law fraud, aiding and abetting, fraudulent concealment, and unjust enrichment.
- Hudson 1 and Hudson 2 were synthetic CDOs referencing RMBS; Goldman structured, underwrote, and served as liquidation agent, with GS & Co as underwriter and GSI as initial Credit Protection Buyer.
- Defendants allegedly reduced Goldman’s subprime exposure through a risk-reduction program in 2006-2007, including shorting RMBS/CDOs and transferring risk via CDS.
- Hudson offerings disclosed certain conflicts of interest and that GSI would act as Credit Protection Buyer, while the complaint alleges omissions about Goldman’s risk strategy and its true market view of profitability.
- Dodona purchased Hudson 2 notes (~$3 million) and Hudson 1 notes (~$1 million) in early 2007; the market deteriorated, leading to downgrades and losses, with regulatory attention including Senate Subcommittee findings.
- Court granted in part and denied in part the defendants’ Rule 12(b)(6) motions to dismiss, setting up ongoing questions of scienter, omissions, market manipulation, and control liability.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Section 10(b) misrepresentation/omission elements | Dodona alleges material omissions and misstatements. | Defendants contend disclosures were adequate and factual omissions lack duty. | Survives for omissions; materiality and duty issues require fact-finding. |
| Market manipulation under 10(b)/Rule 10b-5 | Hudson CDO structuring and marketing manipulated prices. | Market manipulation requires deceptive market activity; plaintiffs lack efficient market basis. | Dismissed as market manipulation; market not sufficiently efficient here. |
| Scienter standard | Defendants knew assets were toxic and acted recklessly/with motive. | Arguments about intent too speculative at pleading stage. | Sufficient for a strong inference of recklessness at this stage. |
| Reliance and loss causation | Omissions were material; reliance presumed; losses linked to concealment. | Sophistication and public information could defeat reliance; loss causation contested. | Reliance presumed; loss causation alleged adequately. |
| Section 20(a) control liability | Goldman/GS & Co and executives controlled primary violators. | Need more direct control proof. | Survives; control allegations adequate at motion to dismiss. |
Key Cases Cited
- ATSI Communications, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007) (requires pleading of manipulation with particularity; strong for scienter)
- Kalnit v. Eichler, 264 F.3d 131 (2d Cir. 2001) (strong inference of scienter; conscious misbehavior standard)
- Basic Inc. v. Levinson, 485 U.S. 224 (1988) (fraud on the market theory and reliance principles)
- Parmalat Sec. Litig., 376 F.Supp.2d 472 (S.D.N.Y. 2005) (fraud on market/efficiency considerations in loss causation)
- Bear Stearns Cos., Inc. Sec. Litig., 763 F.Supp.2d 423 (S.D.N.Y. 2011) (recklessness/intentional conduct in fraud claims; pleading sufficiency)
- In re Citigroup Inc. Sec. Litig., 753 F.Supp.2d 206 (S.D.N.Y. 2010) (application of recklessness and scienter standards; control/aid")
- Landesbank Baden-Wurttemberg v. Goldman, Sachs & Co., 821 F.Supp.2d 616 (S.D.N.Y. 2011) (rejects claims based on lack of particularized nonpublic info as to toxicity)
- In re Am. Int’l Grp., Inc. Sec. Litig., 741 F.Supp.2d 511 (S.D.N.Y. 2010) (risk disclosures and materiality considerations; boilerplate disclosures)