SEC Opens Investigation Against Goldman Sachs

“The Securities and Exchange Commission today charged Goldman, Sachs & Co. and one of its vice presidents for defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter. The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (EVERY) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO. “The product was new and complex but the deception and conflicts are old and simple,” said Robert Khuzami, Director of the Division of Enforcement. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.” Kenneth Lench, Chief of the SEC’s Structured and New Products Unit, added, “The SEC continues to investigate the practices of investment banks and others involved in the securitization of complex financial products tied to the U.S. housing market as it was beginning to show signs of distress.” The SEC alleges that one of the world’s largest hedge funds, Paulson & Co., paid Goldman Sachs to structure a transaction in which Paulson & Co. could take short positions against mortgage securities chosen by Paulson & Co. based on a belief that the securities would experience credit events. According to the SEC’s complaint, filed in U.S. District Court for the Southern District of New York, the marketing materials for the CDO known as ABACUS 2007-AC1 (ABACUS) all 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. The SEC alleges that undisclosed in the marketing materials and unbeknownst to investors, the Paulson & Co. hedge fund, which was poised to benefit if the RMBS defaulted, played a significant role in selecting which RMBS should make up the portfolio. The SEC’s complaint alleges that after participating in the portfolio selection, Paulson & Co. effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (CDS) with Goldman Sachs to buy protection on specific layers of the ABACUS capital structure. Given that financial short interest, Paulson & Co. had an economic incentive to select RMBS that it expected to experience credit events in the near future. Goldman Sachs did not disclose Paulson & Co.’s short position or its role in the collateral selection process in the term sheet, flip book, offering memorandum, or other marketing materials provided to investors. The SEC alleges that Goldman Sachs Vice President Fabrice Tourre was principally responsible for ABACUS 2007-AC1. Tourre structured the transaction, prepared the marketing materials, and communicated directly with investors. Tourre allegedly knew of Paulson & Co.’s undisclosed short interest and role in the collateral selection process. In addition, he misled ACA into believing that Paulson & Co. invested approximately $200 million in the equity of ABACUS, indicating that Paulson & Co.’s interests in the collateral selection process were closely aligned with ACA’s interests. In reality, however, their interests were sharply conflicting. According to the SEC’s complaint, the deal closed on April 26, 2007, and Paulson & Co. paid Goldman Sachs approximately $15 million for structuring and marketing ABACUS. By Oct. 24, 2007, 83 percent of the RMBS in the ABACUS portfolio had been downgraded and 17 percent were on negative watch. By Jan. 29, 2008, 99 percent of the portfolio had been downgraded. Investors in the liabilities of ABACUS are alleged to have lost more than $1 billion. The SEC’s complaint charges Goldman Sachs and Tourre with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5. The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest, and financial penalties.” Rough translation : “Securities and Exchange Commission today charged Goldman, Sachs & Co. and one of its vice presidents, to trick investors by misstating and omitting basic information about financial products associated with substandard mortgages, how the US housing market began to falter. SEC approves, , that Goldman Sachs is in the structured and synthetic secured debt market (EVERY), which depended on the execution of mortgage-backed residential mortgage-backed securities (RMBS).Goldman Sachs Failed to Disclose CDO Information to Investors, in particular, that role, which the main hedge funds have played in the portfolio selection process, and also the fact, that the hedge fund took a short position in the CDO. “The product is new and complex, but deception and conflict, old and simple”, said Robert Khuzami, director of the law enforcement department. “Goldman mistakenly authorized client, who staked on the mortgage market to a large extent, which mortgage-backed securities to include in the investment portfolio, while other investors say, that the securities were selected based on the results of an independent, objective third party”. Kenneth Lentch, Chief of the Structured Securities and Exchange Commission and New Products Group, added: “The SEC continues to investigate the practices of investment banks and other participants in the securitization of complex financial products related to the US housing market, how it started to show signs of distress “. SEC approves, that one of the largest hedge funds in the world, Paulson & Co., paid Goldman Sachs to the structure of the deal, in which Paulson & Co. may take a short position in mortgage-backed securities selected by Paulson & Co., based on the belief that the securities will experience credit events. According to the complaint to the Securities and Exchange Commission, filed in the United States District Court for the Southern District of New York, marketing materials for CDO known as ABACUS 2007-AC1 (ABACUS) everyone imagined, that the portfolio of mortgage-backed securities, underlying CDO was selected by ACA Management LLC ( ACA), Third side, experienced in credit risk analysis at RMBS. SEC approves, what is undisclosed in marketing materials and invisible to investors, Paulson & Co of Hedge Funds, who are ready will not win, if the default of mortgage-backed securities, played a significant role in choosing RMBS to build a portfolio. Complaint to the Securities and Exchange Commission approves, that after participating in the portfolio, the choice, Paulson & Co effectively short the RMBS portfolio she helped select, entering into credit default swaps (CDS) с Goldman Sachs, to buy protection against specific layers of ABACUS by capital structure. Considering, that financial short interest, Paulson & Co. had economic incentives to select RMBS, that she plans to experience credit events in the near future. Goldman Sachs did not disclose to Paulson & Co. the short position or its role in the collateral selection process, letter, flip books, offering memorandum, or other marketing materials provided to investors. SEC approves, that Goldman Sachs Vice President Fabrizio Tourre has primary responsibility for ABACUS 2007-AC1. Tourre structured transactions, prepared marketing materials, and also communicated directly with investors. Tourre allegedly knew Paulson & Co. with an undisclosed brief interest and role in the collateral selection process. Besides, he misled the ACA to believe, what Paulson & Co. have invested about $ 200 million in ABACUS shares, about that, that Paulson & Co.'s interests in the collateral selection process were closely aligned with those of the ACA. In reality, but, their interests are in sharp contrast to each other. Securities and Exchange Commission complaints, deal closed 26 April 2007, and Paulson & Co. paid by Goldman Sachs approximately $ 15 million for structuring and marketing ABACUS. By October 24, 2007, 83 percent of mortgage-backed securities in the ABACUS portfolio was reduced to 17 percent were in negative hours. TO 29 January 2008, 99 percentage of the portfolio was downgraded. Investors in ABACUS liabilities, allegedly, lost more $ 1 Billion Securities and Exchange Commission charges Goldman Sachs and Tourre with Article Violations 17 (and) Of the Securities Law 1933 of the year, partition 10 (b) Trade in Valuables Act 1934 and Exchange Law Rule 10b-5. Commission seeks injunction, about return profit, pre-judgment interest, as well as financial sanctions “.