New York (HedgeCo.Net) – The SEC in 2010 filed securities fraud charges against Goldman, Sachs & Co. and an employee, Fabrice Tourre, for making material misstatements and omissions in regards to a CDO that contributed to the financial crisis by magnifying losses associated with the downturn in the United States housing market.
The case, which went to trial this week, began with the selection of five women and four men as jurors on Monday, and is now hearing witness testimony in the case. Gail Kreitman, a saleswoman for Goldman is testifying today, ahead of schedule.
“As part of her testimony, the SEC is expected to play a tape recorded by ACA’s phone system in which Ms. Kreitman reportedly says that Paulson was taking a “hundred percent of the equity” in the deal, implying it was betting the instrument’s value would rise, not fall.” WSJ reports.
Law 360 reports: “SEC lawyer Matthew T. Martens told jurors that Tourre committed securities fraud by allegedly failing to tell investors that a Goldman CDO from 2007, called Abacus 2007-AC1, was partially created by a hedge fund manager who bet against it.”
According to the Commission’s complaint, Tourre prepared the marketing materials for the CDO and communicated directly with investors. Tourre is alleged to have known of Paulson’s undisclosed short interest and its role in the collateral selection process. He is also alleged to have misled ACA into believing that Paulson invested approximately $200 million in the equity of ABACUS 2007-AC1 (a long position) and, accordingly, that Paulson’s interests in the collateral section process were aligned with ACA’s when in reality Paulson’s interests were sharply conflicting. The deal closed on April 26, 2007.
Paulson paid GS&Co approximately $15 million for structuring and marketing ABACUS 2007-AC1. By October 24, 2007, 83% of the RMBS in the ABACUS 2007-AC1 portfolio had been downgraded and 17% was on negative watch. By January 29, 2008, 99% of the portfolio had allegedly been downgraded. Investors in the liabilities of ABACUS 2007-AC1 are alleged to have lost over $1 billion. Paulson’s opposite CDS positions yielded a profit of approximately $1 billion.
The Guardian put a twist on the story asking: “The SEC already reached a ‘no fault’ settlement with Goldman Sachs, so how can it bring down Tourre for the same non-crime?”
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