SEC charges Goldman Sachs with defrauding investors in subprime mortgages
By GAIL LIBERMAN
Special to the Daily News
April 16, 2010
The U.S. Securities and Exchange Commission charged giant Wall Street investment bank Goldman Sachs & Co. Friday with defrauding investors in a subprime mortgage investment as the housing market collapsed.
Claiming its investigation is continuing, the SEC charged that Goldman and its vice president, Fabrice Tourre, structured a synthetic collateralized debt obligation in 2007 that was designed to fail. A collateralized debt obligation is a security that hinges on the performance of securities backed by debt. In this case, the debt involved mortgages to borrowers with poor credit ratings.
“The SEC’s charges are completely unfounded in law and fact, and we will vigorously contest them and defend the firm and its reputation,” countered Goldman Sachs in a prepared statement.
Upon the announcement, the market euphoria that had finally sent the Dow Jones Industrial Average over 11,000 during the week ended.
While the Dow closed down about 125, led by the largest financial institutions, gold futures also had dropped 2 percent.
In its civil complaint, filed in New York federal court, the SEC says one of the world’s largest hedge funds, Paulson & Co. Inc., paid Goldman Sachs about $15 million for structuring and marketing the collateralized debt obligation.
It also contends the company played a significant role in selecting the investment’s holdings. Then it bet on its failure by buying protection from Goldman Sachs on it.
John Paulson, who runs the large hedge fund and was not charged, is unrelated to former Treasury Secretary Henry Paulson, according to published reports.
“Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio,” said Robert Khuzami, director of the SEC division of enforcement.
This “while telling other investors that the securities were selected by an independent, objective third party,” he said.
The SEC claims the actions caused investors to lose more than $1 billion, while Paulson’s opposite positions yielded a profit of about $1 billion.
The SEC charges that Goldman Sachs’ Tourre was largely responsible for the collateralized debt obligation, known as “ABACUS 2007-AC1.”
He not only devised the transaction, but also prepared marketing materials and communicated directly with investors.
“Tourre is alleged to have known of Paulson’s undisclosed short interest and its role in the collateral selection process,” the SEC said.
A Boca Raton law firm, KlaymanToskes, says it has already picked up at least six clients for whom it was planning to file FINRA arbitration claims against Goldman Sachs.
“We’ve been receiving inquiries from London and all over the globe on this,” said Lawrence L. Klayman, the firm’s senior partner.
While the SEC’s complaint centers on a single collateralized debt obligation, “ABACUS 2007-AC1,” Klayman said his firm expects to probe further.
Abacus, Klayman explained, is a Goldman Sachs brand.
“We will be looking into the entire Abacus line,” Klayman said. “This leads me to wonder what other nondisclosures are out there that are going to be uncovered.”
The SEC complaint “is going to provide the groundwork for all documentary evidence that will be laid out in the case,” Klayman said. “This makes our job much easier.”
Christopher Whalen, managing director of Institutional Risk Analytics in Van Nuys, Calif., said the SEC move “also implies a further assault (by the regulator) on the (over the counter) derivatives markets.”