NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co.

NECA-IBEW Health & Welfare Fund (NECA) (plaintiff) purchased mortgage-backed certificates in a public offering. The certificates were underwritten by Goldman Sachs & Co. and issued by GS Mortgage Securities Corp. (collectively, GS) (defendants). NECA brought a putative class action under § 11 of the Securities Act of 1933 (Securities Act) against GS on behalf of all certificate purchasers, alleging that the offering documents contained materially false and misleading statements and omissions about the mortgage originators’ underwriting guidelines, the loans’ property appraisals, and the risks associated with the certificates. Section 11 permitted securities purchasers to sue issuers and underwriters for material false statements or omissions in a registration statement and to recover as damages the difference between the amount paid for the security and the security’s value when the suit was brought. NECA alleged that it was injured by its exposure to enhanced risk with respect to the timing and amount of cash flow under the certificates, and that the value of the certificates and price at which they could be sold had declined. NECA supported its injury claim by asserting that the rating agencies had put negative-watch labels on the certificates and downgraded previous ratings and that originators had made loans without determining whether borrowers’ monthly incomes would cover their mortgage obligations and property expenses. The district court dismissed the § 11 claim, holding that the exposure to enhanced cash-flow risk was insufficient to plead injury because the offering documents warned that the certificates might not be resalable and the failure to receive payments due under the certificates was required to allege a cognizable § 11 injury. NECA appealed.