In 2010, The Securities and Exchange Commission (SEC) which was created in 1934 & which holds the primary responsibility for enforcing federal securities law and regulating the securities industry in America, charged Goldman-Sachs with the structuring & marketing of CDO’S that hinged on the performance of RMBS.
The SEC alleged that Goldman & Fabrice Tourre a top executive at Goldman, had violated anti-fraud provisions by structuring & marketing these complex products, in particular failing to disclose essential information to investors.
Some of the breaches included a failure to disclose the role Paulson & Co Inc. a major hedge fund played in the portfolio selection process and the fact that Paulson and Sachs had taken a short position against the CDO , essentially they believed that the value of the portfolio would go down. This was a clear conflict of interest as Paulson were allowed to choose the sub-prime mortgages to be thrown into the Abacus. Paulson had inside information and were able to bet against the RMBS to the detriment of Goldman’s clients.
Clients & investors included ACA : a third party with experience analysing credit risk in RMBS, IKB : a commercial bank in Germany, who lost $150m in to the Abacus , ABN AMRO : one of the largest banks in Europe before it was acquired by RBS .
These investors were provided with misleading information and were not notified of the fact that Goldman and Paulson Inc.; who was involved in the structuring of the security were betting against these securities and actually profited from them at the expense of Goldman’s clients . This behaviour was criminal and fraudulent, it showed clear conflicts of interest, a lack of duty of care for investors and mostly results in a loss of confidence in the financial sector and huge losses for counter parties.
Fabrice Tourre misled ACA by making them believe that Paulson was taking the short position and that his interests were aligned with theirs. In contrast Paulson’s position was clearly the opposite.
The Abacus deal was closed off in April 2007 but by October 2007, 83% of the portfolio were downgraded and 17% were on negative watch. By late January 2008 99% of the portfolio were downgraded with investors losing up to $1billion, most of which went to Paulson for taking the short position . One of the reasons for these was that the housing and sub-prime market in America was highly toxic and was underperforming.
Goldman Sachs was fined $500milion by the SEC, with the regulators stating that “half-truths and deceptions” would not be tolerated . This fine was the largest fine in the Securities and Exchange Commission’s history and sent out a message to Wall Street that there excesses would have to be curbed.
Robert Khuzami, director of the SEC’s division of enforcement, said: “This settlement is a stark lesson to Wall Street firms that “no product is too complex”, and “no investment too sophisticated”, to avoid a heavy price...