Thursday, 25 August 2016
Last updated 20 hours ago
Apr 16 2010 | 11:23am ET
Goldman Sachs misled investors about a collateralized debt obligation it set up for Paulson & Co., the Securities and Exchange Commission has charged.
According to the SEC complaint, Paulson—which made its name three years ago turning in triple-digit returns by better against subprime mortgages—paid Goldman $15 million to structure and market a synthetic CDO called ABACUS 2007-AC1. Paulson allegedly play “a significant role” in picking the residential mortgage-backed securities that went into the CDO, and then shorted it, entering into credit default swaps with Goldman itself.
Goldman Vice President Fabrice Tourre, who was in charge of the ABACUS CDO, allegedly knew that Paulson was shorting the CDO and failed to disclose the hedge fund’s role in portfolio selection in its marketing materials. In fact, according to the SEC, Tourre and Goldman defrauded investors by leading them to believe that the RMBS underlying the CDO were chosen by ACA Management, a third party. The firm also failed to disclose Paulson’s short interest in the CDO.
“The product was new and complex but the deception and conflicts are old and simple,” Robert Khuzami, director of enforcement at the SEC, said. “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.”
Paulson itself is not accused of wrongdoing in the case, but the SEC allegations—if true—shine a light on how the little-known New York hedge fund was able to post such huge returns as the subprime market faltered. Paulson’s success—on the ABACUS CDO alone, some 99% of the portfolio was downgraded by January 2008, just nine months after the deal had closed—has turned it into one of the world’s largest hedge funds, managing $32 billion.
On the other hand, investors in ABACUS liabilities were left with more than $1 billion in losses, the SEC said. The regulator is seeking injunctive relief, disgorgement of ill-gotten gains, prejudgment interest and financial penalties.
SEC Complaint Against Goldman Sachs & Fabrice Tourre (April 16, 2010)
Goldman Sachs Abacus Pitchbook (February 26, 2007)