http://m.cnbc.com/us_news/36597402
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The critical misrepresentation Goldman Sachs made to investors in the deal known as Abacus was that the mortgage-bond portfolio to which Abacus was tied was "selected by ACA Management LLC," the SEC said in its complaint. Those are the very words that appeared in Goldman's 2007 pitch book for potential investors, and in other sales materials.
However, the SEC alleges that this statement was false and misleading, and amounted to fraud. What Goldman failed to tell its investors is that its client, the hedge fund Paulson & Co., played a significant role in ACA's selection of the particular mortgage bonds to be included in the debt securities (CDOs) that were to be offered for sale. Nor did Goldman disclose that Paulson's hedge fund planned to take a short position on these debt securities that Abacus issued, essentially betting against them -- a bet that ultimately would make Paulson more than a $1 billion in profit.
Most damaging to Goldman, the SEC cited an internal Goldman e-mail from March 2007 by Goldman vice president and co-defendant Fabrice Tourre, in which he described the Abacus portfolio as having been "selected by ACA/Paulson." This was a very unfortunate admission from Goldman's point of view. Why? Because Paulson had identified more than 100 subprime-mortgage bonds it thought would soon default. He then asked Goldman/ACA to structure synthetic collateralized debt obligations whose value would be tied to the performance of those bonds or others like them, so that his hedge fund could bet against them.
To add to Goldman's incrimination, an internal ACA e-mail raised this question: "Attached is the revised portfolio that Paulson would like us to commit to. The final portfolio will have between 80 and these 92 names. Are we ok to say yes on this portfolio?" Another ACA employee responded, "Looks good to me." A few weeks later, Paulson and ACA agreed on a portfolio tied to 90 junk mortgage bonds, the SEC said.
So, who selected the junk bonds in the portfolio? If the SEC's facts are right, it looks like Paulson and ACA both did important facts which were not disclosed to the buyers of the CDOs that were comprised of these junk bonds.
In a nutshell, the SEC has alleged that Goldman Sachs materially misstated and omitted facts in disclosure documents for a synthetic credit default obligations (CDO) product it originated. Specifically, the allegation is that Goldman misrepresented to its Abacus investors that an "objective third party," ACA Management, had assembled the mortgage package underlying the CDO's when, in fact, a large hedge fund (Paulson & Co) with economic interests directly adverse to investors had a major role in assembling the mortgage package. The SEC further claims that the hedge fund specifically inserted mortgages that it knew were very likely to default, so that it could make money by shorting (betting against) those same CDO's.
One question for a jury would be whether it was materially misleading for Goldman to omit Paulson's name from its sales materials. While ACA may have had the final say on paper, it needed Paulson's approval. Goldman wouldn't have made the Abacus offering to its customers if Paulson hadn't gotten what it wanted, because Paulson wouldn't then have been interested in shorting it, meaning no fee for Goldman.
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