The German bank ended up posting a $37 million loss on the investment.
The U.S. bank sold the security to a Luxembourg affiliate of LBBW, presenting the security as "safe, secure, and nearly risk free," according to the LBBW complaint.
Meanwhile, the complaint says, Goldman senior executives were privately saying that "it was game over" for subprime lenders, and reducing their exposure to subprime mortgages.
"Goldman knew at the highest levels of its organization that its representations to LBBW Luxemburg that the notes merited triple-A ratings and were high grade were blatantly false," the Stuttgart-based bank said. "Goldman committed fraud and, or, was negligent in marketing and selling the notes to LBBW Luxemburg."
Michael DuVally, a Goldman Sachs spokesman, declined to comment to Bloomberg News.