Goldman Sachs Charged with Fraud!

Finally! The golden boys finally aren't going to get away with something. The actual SEC complaint is online here. First:

The Players are Goldman Sachs, Paulson & Co. (a hedge fund run by John Paulson) and one Goldman Sachs VP, Fabrice Tourre.

The fictional investment vehicle in question is ABACUS 2007-AC1.

The Victims are IKB Deutsche Industriebank, Royal Bank of Scotland.

The Money is $1 billion in rigged profits to Paulson, $1 billion in losses to the victims, $15 million to Goldman Sachs for rigging the CDO.

Here is the entire SEC press release:

SEC Charges Goldman Sachs With Fraud in Structuring and Marketing of CDO Tied to Subprime Mortgages
FOR IMMEDIATE RELEASE
2010-59

Washington, D.C., April 16, 2010 — The Securities and Exchange Commission today charged Goldman, Sachs & Co. and one of its vice presidents for defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter.
Additional Materials

* Litigation Release No. 21489
* SEC Complaint

The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.

"The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, Director of the Division of Enforcement. "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."

Kenneth Lench, Chief of the SEC's Structured and New Products Unit, added, "The SEC continues to investigate the practices of investment banks and others involved in the securitization of complex financial products tied to the U.S. housing market as it was beginning to show signs of distress."

The SEC alleges that one of the world's largest hedge funds, Paulson & Co., paid Goldman Sachs to structure a transaction in which Paulson & Co. could take short positions against mortgage securities chosen by Paulson & Co. based on a belief that the securities would experience credit events.

According to the SEC's complaint, filed in U.S. District Court for the Southern District of New York, the marketing materials for the CDO known as ABACUS 2007-AC1 (ABACUS) all represented that the RMBS portfolio underlying the CDO was selected by ACA Management LLC (ACA), a third party with expertise in analyzing credit risk in RMBS. The SEC alleges that undisclosed in the marketing materials and unbeknownst to investors, the Paulson & Co. hedge fund, which was poised to benefit if the RMBS defaulted, played a significant role in selecting which RMBS should make up the portfolio.

The SEC's complaint alleges that after participating in the portfolio selection, Paulson & Co. effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (CDS) with Goldman Sachs to buy protection on specific layers of the ABACUS capital structure. Given that financial short interest, Paulson & Co. had an economic incentive to select RMBS that it expected to experience credit events in the near future. Goldman Sachs did not disclose Paulson & Co.'s short position or its role in the collateral selection process in the term sheet, flip book, offering memorandum, or other marketing materials provided to investors.

The SEC alleges that Goldman Sachs Vice President Fabrice Tourre was principally responsible for ABACUS 2007-AC1. Tourre structured the transaction, prepared the marketing materials, and communicated directly with investors. Tourre allegedly knew of Paulson & Co.'s undisclosed short interest and role in the collateral selection process. In addition, he misled ACA into believing that Paulson & Co. invested approximately $200 million in the equity of ABACUS, indicating that Paulson & Co.'s interests in the collateral selection process were closely aligned with ACA's interests. In reality, however, their interests were sharply conflicting.

According to the SEC's complaint, the deal closed on April 26, 2007, and Paulson & Co. paid Goldman Sachs approximately $15 million for structuring and marketing ABACUS. By Oct. 24, 2007, 83 percent of the RMBS in the ABACUS portfolio had been downgraded and 17 percent were on negative watch. By Jan. 29, 2008, 99 percent of the portfolio had been downgraded.

Investors in the liabilities of ABACUS are alleged to have lost more than $1 billion.

The SEC's complaint charges Goldman Sachs and Tourre with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5. The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest, and financial penalties.

 

The victims (courtesy of CBS MarketWatch) are Royal Bank of Scotland and ABN Amro. Now check out how much money they lost (and Goldman Sachs gained!)

RBS unwound the ABN position in the security at issue by paying Goldman $840.9 million, and IKB lost almost all of its $150 million.

That's just one CDO, just one investment. and...our Congress cannot reform and regulate derivatives?

Recall our many posts proving the mathematics of these CDOs and CDSes is not valid, nor can one prove, computationally that the pricing of these derivatives is correct. Finally, one cannot find out what exactly a CDO is stuffed with.

That's what makes this case so interesting. Someone obviously got sloppy and left a real person paper trail with which the SEC could prove their case. How many other rip offs are out there, had happened and are happening which cannot be proved in court?

See bad math, bad computation on how one can rig a CDO without anyone being able to figure it out.

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About damn time

Can you give us an evaluation of how likely it is that Goldman Sachs will even notice this in any significant way? I mean, is it the kind of thing that'll end with a settlement and get reported on page A-43, or the kind of thing that'll stay in the news and end up costing Goldman Sachs enough money to hurt? Inquiring (yet appallingly ignorant) minds want to know!

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this is what I know so far

Their stock is tanking at the moment, so that will hurt if they don't recover. Fraud, I'm not sure if that is a criminal charge and usually the corporate structure protects officers (executives) and employees from any liability for actions of a corporation.

Right now it's a civil lawsuit, i.e. no one being rounded up in handcuffs and when they did that, i.e. Arther Anderson was charged as a corporation, as accounting fraud, it destroyed the company and got a whole hell of a lot of innocent people fired. On the other hand a corporation in the business of committing fraud, shouldn't be allowed to stay in that business I think.

That said, if it's criminal, I know one can go past the law and get individuals (think Enron, Tyco, Worldcom), but I don't know yet if this will be the case down the road. I know SIGTARP has a host of investigations, some criminal that they are working on, surrounding the financial meltdown and then on the actual bail out itself.

I mean the case is clear, GS is busted by rigging a CDO, especially designed for a hedge fund client, who then shorted the crap out of it by buying up a bunch of CDSes, all the while peddling that same CDO to unsuspecting suckers as an investment vehicle.

This is the type of thing we said was possible with these CDOs earlier. See this one for even the mathematics and the computer science on how rigging CDOs is possible.

I'm just impressed the SEC proved one of these! The things are perfect to leave no paper trail, CDOs, by their structure alone.

But I'll be pissed if it's your typical fine, which so often is just like a toll road on the way to ripping people off, i.e. something makes billions and the fine is 0.0001% of that profit. We've seen this repeatedly, just in the mine disaster it's mentioned, the fines don't come close to even making a dent in the profits.

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how difficult are these to prove?

The reason Paulson & Co., the hedge fund, wasn't charged is because they did not represent the actual CDO to investors, oh no, see, they held CDSes on the cDO!

Then, it appears only one employee of GS was charged. So, we'll get the infamous "hung out to dry" of one guy, without the fact GS has a rigged ponzi scheme, documented here on these things and SIVs which are fiction, CDOs which don't make any sense.... should be plain banned.

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The Real Reason to Split Up the Banking Oligarchy

This is how these always play out. The Justice Department, if even asked, will say criminal charges were too difficult and expensive to prove so they went civil for the lower standard of evidence. Fines will be paid and there will be no admission of guilt. Of course they would spend more money than they will on this to get someone that B&E'd Loyd Blankfein's home and the criminal RICO Act could put anyones grandmother away for murdering Kennedy so neither of the DOJ's reasons hold water.

Government not only refuses to use the tools they have to prosecute the wealthy they created an alternate justice system for them.

A good team of prosecutors with some cash for investigation could easily prove a conspiracy on Wall Street tied to predicate acts. They prosecuted Miliken this way (I believe the first and only use against a Wall Streeter) but of course demurred against Drexel. As another poster said its the sacrificial lamb when the very nature of RICO is to bring in all the people involved in the conspiracy.

If this was a criminal RICO Act charge all of Goldman's assets would be immediately frozen or a huge bond would have to be posted.

So basically the big banks and big firms are not only too big to regulate they are also too big to prosecute. In effect by not breaking them up the government is saying they are okay with the financial sector committing crimes.

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Sen. Lincoln Bill

I'd say a point of consensus is to break up the big banks or at least do the "Volcker rule". Sen. Lincoln introduced a new bill, which I'm trying to look at, from 1st principles because frankly when it comes to legislation I don't trust any pundit's recommendation, including Ratigan, who has been "on the mark" on financial reform.

Then, supposedly Obama is claiming he'll veto anything w/o derivatives "reform" and last but not least, we hear the GOP will act in concert to try to block....well, the usual, anything, including debate.

All of this requires a major blog piece update on what's happening but I am sure sick of reading over and over and over again, gotta be going on for 30 years, glorified white collar crime either being "civil" or legal. and I'm disgusted that corporate crime, which is GS here, over and over again, almost gets a gov. kickback, as a fine, or a small cut of the take.

If anyone else is really researching into the latest in the Senate, i.e. reading the bills, an in depth blog post would be most welcome. It's a lot of research to dig in deep and not just repost some newspaper or pundit view.

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Sorry guys, this is all sound and fury, signifying nothing

It's nice to think something would actually happen. But this is a press-staged event so the public hears "case", "charges", and "Goldman Sachs" all in one sentence.

It's civil, not criminal.

Goldman will arrange for Tourre to be the lone wolf bad guy.

Goldman will pay a small fine (well, small to them) that amounts to nothing more than a rounding error on the billions they skim.

The regulatory agency and the pols can say they "did something".

Goldman returns to business as usual.

Tourre will be in some other cush Wall Street job within a year or two.

And life goes on for a few years until the next big banking scandal.

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dot con era

I agree. Citigroup did outrageous gaming of IPOs and got a fine that was little of the money actually made. Nothing happened to the "executives" of absurd start ups. They made millions in IPOs while they had no real business model or product.

But, at least it's "something" and from the market reaction and public relations front it's good.

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Thank you Yellow Dog!

I looked that up but unfortunately went off of the early reports, when it was breaking news, instead of looking up the hedge fund itself, so I thought it was strange, same name but it's also common.

Anywho, please keep those coming. EP is now being picked up on by Google news, as a credible news source, so these sorts of errors that get by are "uncool" and need to be corrected.

All this site has is it's content and I am notorious to flip around words, typos and wrong labels. Rare if I make a data error though, it's proper nouns, titles.

Anyway, I need more eyeballs like yours.

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Ratigan is also making it to the SMC

This is the 2nd time I pulled in a Ratigan piece into the weekly economic funnies roundup.

Not that it's bad. Frankly John Stewart has often given more real information in his skits than CNN.

BTW, who thinks the claim CNN isn't biased is absurd. It's more like they are vague and so often present material that is just pure lobbyist punditry fiction. It's not accurate, in depth reporting overall, so it's become a drivel of vanilla nothing to me. They are blaming their ratings fall because they do "objective hard news". Just ridiculous. AP, Reuters, Bloomberg, PBS are doing objective hard video news in the U.S.

Ratigan really is a "must watch" on the financial crisis, although on some other issues, I wince. He should stick to finance/econ. ;) It's almost like he's channeling this site's "Populist" outrage meme with accurate facts to back it all up.

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They'll all get away with it

"The golden boys finally aren't going to get away with something"

While I completely agree with your enthusiasm regarding the *attempted* prosecution of GS, I don't believe for a minute that anything serious will happen.

1) The government is too deeply involved with the banks, and vice versa.
2) If GS was once determined to be TBTF (Too Big To Fail), then they'll be declared that again.
3) We no longer live in a Capitalistic country. Sadly, the last "capitalistic" leader we had (Bush) proved that by starting the bailout of everyone and their brother.

Granted, those reasons I stated are somewhat "weak", but those will be the underlying causes as to why GS will not be taken down. They might get a Billion or 2 fine and then they'll recover in 2-3 Quarters thereafter. As for Germany or the UK prosecuting GS - well, that gave me a good laugh. I'd love to see it happen, but then again, I'd also love to see Brendan Frasier develop good acting skills.

BUT, let's assume I'm wrong (and I'd love to be wrong), the best case is that they completely fall either through fraud charge after fraud charge or civil suit after civil suit. It's irrelevant, they already won. No one will go to jail, but everyone will be out of a job, whoopdee doo. The people responsible already made their millions or billions and can relax in the lap of luxury knowing that they successfully robbed the American public.

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Morally Bankrupt

The U.K. Prime Minister Gordon Brown is calling Goldman Sachs morally bankrupt.

Duh! They all are! They think it's business as usual to even run countries, nations into the ground. They believe their daily profits and bonuses are more important than country and scoff at those who still believe honor to country is an important moral value.

The thing about this though is maybe, maybe government leaders will stop doing the status quo, realize corporations have more power than governments and actually do something.

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SEC vote split along party lines

It looks like the SEC is all about politics.

(Bloomberg) -- The U.S. Securities and Exchange Commission split 3-2 along party lines to approve an enforcement case against Goldman Sachs Group Inc., according to two people with knowledge of the vote.
SEC Chairman Mary Schapiro sided with Democrats Luis Aguilar and Elisse Walter to approve the case, said the people, who declined to be identified because the vote wasn’t public. Republican commissioners Kathleen Casey and Troy Paredes voted against suing, the person said.

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Khuzami said on the commission

they changed the rules so they can do investigations regardless of what the vote is.

Considering this "revelation", surprise, the SEC is stuffed with insider political cronies, that sounds like a good thing.

One thing I wonder about. If someone works on Wall street, odds are they will at least become a millionaire due to outrageous bonuses, salary.

So, how much does the SEC payout? I mean it's almost like a bribe, making sure it keeps the financially savvy out of D.C., unless of course they are an arm of the lobbyists/financial sector itself.

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Investigate AIG too

Two lawmakers say Goldman Sachs and AIG should be part of the same probe.

(Bloomberg) -- The regulator suing Goldman Sachs Group Inc. for fraud should widen its probe to determine whether securities backed by bailed-out insurer American International Group Inc. were improperly created, said two lawmakers.
It is “not beyond the realm of comprehension” that Goldman Sachs misled investors on collateralized debt obligations apart from the one cited last week by the Securities and Exchange Commission, Democratic Representatives Elijah Cummings and Peter DeFazio said in a letter to be sent to SEC Chairman Mary Schapiro. AIG, rescued by the U.S. in 2008, insured about $6 billion of Goldman Sachs CDOs named Abacus.
“Should any of these transactions be found to include fraudulent conduct, any resulting contractual payments from AIG- issued credit-default swaps could be viewed as ill-gotten gains,” Cummings and DeFazio wrote. “It is imperative that the SEC pursue the recovery from Goldman Sachs of any fraudulently obtained AIG payments.”

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haircut after the fact

I'm disgusted no criminal charges are happening against AIG, for what a rigged game. But yeah, this sounds like a great time to try to get some money back. That post, The Real Screw Job, still doesn't have that large of hits...

although frightening, it comes up 2nd in a Google rank when searching on "real screw job". Uh, where's all of the porno Google, or at least the slang definition?

I'm thrilled we come up so high in Google rank but I still find it scary in some cases. Stuff like CPI, GDP and so on, I'm sorry but the government websites should be pegged when doing a search on that and probably second should be wikipedia or something. Scary.

Anywho, from day 1 I have been completely outraged they made a 100% payout on those CDSes, PLUS gave the underlying CDOs, securities back to the same companies. Unreal!

DeFazio is one of my favorite representatives. He literally said on the House Floor "that's Bullshit!" on the original TARP passage debate.

I've been scanning Hank Paulson's book and it's so obviously a friend of my pal and this entire focus that of course GS and certain chosen ones, certain companies could not collapse...honestly I don't think he even realized it, his universe of elite selected CEOs is almost a mentality bubble but you can see the favoritism right there in the crisis narrative.

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