Goldman Sachs on Friday denied charges that it had defrauded investors in a collateralized debt obligation it structured and marketed for Paulson & Co.
The Wall Street giant called the Securities and Exchange Commission charges “completely unfounded in law and fact” and promised to “vigorously contest them and defend the firm and its reputation.”
The SEC on Friday accused Goldman and one of its vice presidents of failing to alert investors in the CDO, ABACUS 2007-AC1, that Paulson had played “a significant role” in picking the residential mortgage-backed securities included in the CDO, or that the $32 billion hedge fund was shorting it.
In a longer press release issued later Friday, Goldman offered fuller denial of those charges.
“The portfolio of mortgage-backed securities in this investment was selected by an independent and experienced portfolio selection agent,” ACA Management, “after a series of discussions, including with Paulson & Co., which were entirely typical of these types of transactions,” the firm said. “ACA had the largest exposure to the transaction, investing $951 million. It had an obligation and every incentive to select appropriate securities.”
Goldman also said that it never told or implied to ACA that Paulson would not be betting against the CDO. But, in the press release, it did make clear that Goldman was not shorting the vehicle.
“The transaction was not created as a way for Goldman Sachs to short the subprime market,” it said. “To the contrary, Goldman Sachs’s substantial long position lost money for the firm.” Goldman said it lost more than $90 million; Paulson paid it $15 million to structure the transaction.
Paulson has not been accused of any wrongdoing in the case.
Despite its robust defense of itself, Goldman may soon find itself in hot water in multiple jurisdictions. Both British and German regulators are looking into the case and may bring charges of their own.
British Prime Minister Gordon Brown, with an election just weeks away, told the BBC that he wants the U.K. Financial Services Authority to look into the CDO transaction. “There is a moral bankruptcy reflected in what I am reading about and hearing about,” he said.
Meanwhile, across the North Sea, Germany’s BaFin has sought details about the SEC’s lawsuit from the regulator itself, Bloomberg News reports.
The SEC suit charges only Goldman and a vice president who handled the Abacus transaction, Fabrice Tourre. But, according to The New York Times, the executive involvement in Goldman’s housing bets went much further up the corporate ladder.
The firm’s top executives, including CEO Lloyd Blankfein, CFO David Viniar and President Gary Cohn, were active in overseeing Goldman’s mortgage unit, the Times reports. And it was those executives who eventually agreed with Tourre that housing prices were likely to fall.
Goldman said that none of its senior leadership was involved in the Abacus deals.