GOLDMAN SACHS CIVIL LAWSUIT

Goldman Sachs Civil Lawsuit



Goldman Sachs Civil Lawsuit

Background

On April 16, 2010, the Securities and Exchange Commission (SEC) announced that it was suing Goldman Sachs and one of its employees, Fabrice Tourre. The SEC alleged that Goldman materially misstated and omitted facts in disclosure documents for a synthetic CDO product it originated called Abacus 2007-AC1. Goldman was paid a fee of approximately US$15 million for its work in the deal. The allegation is that Goldman misrepresented to investors that an independent selection agent, ACA, had reviewed the mortgage package underlying the credit default obligations, and that Goldman failed to disclose to ACA that a hedge fund, Paulson & Co., that sought to short the package, had helped select underlying mortgages for the package against which it planned to bet.

The SEC further alleged that "Tourre also misled ACA into believing that Paulson invested approximately $200 million in the equity of ABACUS 2007-ACI (a long position) and, accordingly, that Paulson's interests in the collateral section [sic] process were aligned with ACA's when in reality Paulson's interests were sharply conflicting." Goldman Sachs stated that the firm never represented to ACA that Paulson was to be a long investor, and that as normal business practice, market makers do not disclose the identities of a buyer to a seller and vice versa. (www2.goldmansachs.com)

The complaint states that Paulson made a $1 billion profit from the short investments, while purchasers of the materials lost the same amount. The two main investors who lost money were ABN Amro and IKB Deutsche Industriebank. IKB lost $150,000,000 within months on the purchase. ABN Amro lost $840,909,090. Goldman stated the firm also lost $90 million and did not structure a portfolio that was designed to lose money. After the SEC announced the suit during the April 16, 2010 trading day, Goldman's Sachs's stock fell 13% to close at 160.70 from 184.27 on volume of over 102,000,000 shares (vs. a 52 week average of 13,000,000 shares). The firm's shares lost $10 billion in market value during the trading session. On April 30, 2010, shares tumbled further on news that the Manhattan office of the US Attorney General launched a criminal probe into Goldman Sachs, sending the stock down more than 15 points, or nearly ten percent to $145.

Legal analysis

In April 18, 2010, the SEC filed its lawsuit against Goldman Sachs and Fabrice Tourre alleging that they committed securities fraud by failing to disclose to investors that a certain portfolio of mortgage backed securities was substantially picked by another customer who was betting against the viability of those same securities by taking a short position against it. Goldman Sachs and Tourre are alleged to have concealed short seller Paulson & Co.'s role in selecting the underlying mortgages. Instead, they told investors that all securities in the portfolio were selected by ACA Management, a third party with expertise in analyzing credit risk.

The Securities and Exchange Commission charged Goldman, Sachs & Co. and one of its vice presidents for defrauding investors by misstating and omitting key facts about a financial ...