Dodona I, LLC, invested $4 million in two securities offerings from Goldman, Sac

Question

Dodona I, LLC, invested $4 million in two securities offerings from Goldman, Sachs & Co. The investments were in collateralized debt obligations (CDOs). Their value depended on residential mort- gage-backed securities (RMBSs), whose value in turn depended on the performance of subprime residential mortgages. Before marketing the CDOs, Goldman had noticed several “red flags” relating to investments in the subprime market, in which it had invested heavily. To limit its risk, Goldman began betting against subprime mortgages, RMBSs, and CDOs, including the CDOs it had sold to Dodona. In an internal e-mail, one Goldman official commented that the company had managed to “make some lemonade from some big old lemons.” Nevertheless, Goldman’s marketing materials provided only boiler- plate statements about the risks of investing in the securities. The CDOs were later downgraded to junk status, and Dodona suffered a major loss while Goldman profited. Assuming that Goldman did not affirmatively misrepresent any facts about the CDOs, can Dodona still recover under SEC Rule 10b-5? If so, how?i

Can anyone help me with this without any further background information thank you so much!

Explanation / Answer

Yes Dodona can recover it's damages to some extent as Goldman Sachs did not informed the investors about the riskiness or loopholes in the CDO's. Although Goldman Sachs was the one to survive this crisis even after promoting CDO's.

The Sec rule 10b-5 states that:

Employment of manipulative and deceptive practices:

It is unlawful for any person directly or indirectly to employ any practices or device that are fraudulent,to make any untrue statement if material fact or to omit any material statement about facts represented. To engage in any practice which is operated in a manner to deceit a person in relation to purchase or sale of securities.

In the light if this rule Goldman Sachs has made a misstatements regarding the return and risk features of CDO's. They have not been able to educate their clients about the fact that their investments in CDO's are very risky.

In order to establish a claim Dodona should represent

1. Manipulation or deception on part of Goldman through misrepresentation or omissions.

2. Materiality.

3. "In connection with" purchase or sale of securities.

4. Scienter, private plaintiffs have the additional burden of proving this.

5. Loss causation.

6. Damages.

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