Saturday, 2 August 2014
Last updated 13 hours ago
Apr 21 2010 | 11:04am ET
ACA Management knew that Paulson & Co. would be shorting the collateralized debt obligation at the center of the fraud case against Goldman Sachs, a former executive at the hedge fund said.
Paolo Pellegrini, a former portfolio manager at Paulson and one of the Securities and Exchange Commission’s key sources in the case, told the regulator that he had appraised ACA of Paulson’s bet against the residential mortgage-backed securities portfolio. Goldman structured and marketed the CDO for Paulson, but it was ACA that selected the securities that went into it, from a list provided by Paulson.
ACA was one of two major investors on the long side of the CDO, ABACUS-2007-AC1. The bet cost those going long the portfolio some $1 billion.
The SEC alleges that Goldman defrauded investors by failing to disclose Paulson’s role in selecting the securities in the CDO, as well as failing to disclose Paulson’s short interest in the CDO. But Pellegrini, who was a key figure in Paulson’s hugely profitable bets against the subprime mortgage market, testified in an SEC deposition at the end of 2008 that ACA had rejected most the securities Paulson suggested by included in the CDO, and that he had personally told the firm that Paulson would bet against the portfolio.
Asked if he had met with ACA to tell them about Paulson’s plans, Pellegrini told the SEC, “Yes, that was the intention of the meeting,” CNBC reports.
Neither Paulson, firm founder John Paulson nor Pellegrini, who now runs his own hedge fund, PSQR Management, have been charged with any wrongdoing.