Second Circuit Court Of Appeals: Greed Not A Sufficient Motive For Fraud


A federal appeals court has upheld a district court’s dismissal of a securities fraud case involving the sale of a collateralized debt obligation (CDO). The CDO, named Davis Square, was collateralized by residential mortgage-backed securities and underwritten by Goldman Sachs in 2006 (“Goldman Sachs Wins Appeal of Ruling Dismissing CDO Suit,” by Bob Van Voris, Bloomberg).

The lawsuit, filed by Landesbank Baden-Wuerttemberg of Stuttgart, Germany, alleged that Goldman Sachs committed fraud in the sale by representing the CDO as a “High Grade Structured Product CDO” backed by investment-grade mortgage-backed securities. Goldman Sachs and co-defendant TCW Asset Management Co. sold the bank two Davis Square notes totaling $37 million.

U.S. District Judge William Pauley III dismissed the case, ruling that the bank’s complaint did not contain sufficient fraud allegations against Goldman Sachs or TCW. The bank appealed and the Second Circuit Court of Appeals upheld Judge Pauley’s decision.

According to the article, the three-judge appellate panel concluded: “The complaint in this case does not ascribe to Goldman or TCW any particular motive for committing fraud beyond a general profit motive common to all corporations, which does not suffice.”

Investor attorney J. Boyd Page of Atlanta-based Page Perry commented: “This ruling by the Second Circuit is just a travesty. The court is refusing the plaintiff an opportunity to present evidence of securities fraud and have its day in court on the ground that greed is not a sufficient motive for fraud. The mind reels.”

In addition, one must question the discussion of “motive” in the first place. Scienter, commonly known as “intent,” is an element of any fraud claim. But motive, at least based upon our understanding, is not.

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.