The SEC has charged Goldman Sachs & Co. (“Goldman”) and a Vice President, for misleading investors by misstating and omitting material facts about a derivative product tied to sub-prime mortgages.
The SEC complaint alleges that Goldman structured and marketed a synthetic collateralized debt obligation (“CDO”) tied to sub-prime residential mortgage-backed securities (“RMBS”). Goldman failed to notify investors of essential information about the CDO, including the role that a large hedge fund, Paulson & Co. (“Paulson”) played in portfolio selection and the fund took a short-sale position on the CDO.
The SEC is continuing to study investment banks’ practices and others involved in the securitization of complex financial products, including derivatives, tied to the national housing market.
Paulson apparently paid Goldman to structure a transaction in which the fund would take short positions against mortgage securities chosen by Paulson, based on the belief that the securities would experience credit problems.
The marketing materials for the CDO – known as ABACUS 2007-AC1 (ABACUS) – represented that the RMBS portfolio underlying the CDO was selected by ACA Management LLC (“ACA”), a third party with expertise in analyzing credit risk in RMBS. Omitted from the marketing materials, however, was that Paulson would benefit if the RMBS defaulted and played a significant role in selecting which RMBS comprised the portfolio.
Paulson, therefore, had an economic incentive to select RMBS in that it expected to experience credit events. Goldman did not disclose Paulson’s short position, or its role in the collateral selection process.
The SEC alleges that Goldman Vice President Fabrice Tourre was responsible for the ABACUS 2007-AC1 transaction, and that he misled ACA into believing that Paulson invested approximately $200 million in the equity of ABACUS, stating that Paulson interests in the collateral selection process were closely aligned with ACA’s interests. Their interests, however, were sharply conflicting.
Goldman received approximately $15 million for marketing and structuring ABACUS. Investors in ABACUS are believed to have lost more than $1 billion.
If you or someone you know has incurred losses in the Goldman fraud, you or they should seek the counsel of a qualified securities attorney.