Goldman Sachs charged with fraud by SEC

http://www.reuters.com/article/idUSTRE63F3JX20100416?feedType=RSS&feedName=topNews

(Reuters) - Goldman Sachs Group Inc was charged with fraud on Friday by U.S. securities regulators in the structuring and marketing of a debt product tied to subprime mortgages.

U.S.

The Securities and Exchange Commission lawsuit alleges that Paulson & Co, a major hedge fund run by the billionaire John Paulson, worked with Goldman in creating the collateralized debt obligation, and stood to benefit as its value fell, costing investors more than $1 billion.

Fabrice Tourre, a Goldman vice president who the SEC said was principally responsible for creating the product, was also charged with fraud.

Paulson has not been charged. "Goldman made the representations here to the investors, Paulson did not," SEC enforcement chief Robert Khuzami said on a conference call.

Spokesmen for Goldman and Paulson had no immediate comment. Tourre could not immediately be reached.

The lawsuit, filed in Manhattan federal court, marks a dramatic expansion of regulatory efforts to hold people and companies responsible for activity that contributed to the nation's financial crises. It also comes as lawmakers in Washington debate sweeping reform of financial industry regulation.

"This is big," said Walter Todd, a portfolio manager at Greenwood Capital Associates LLC. "Reputationally, obviously, it is damaging. I'm still kind of in shock."

In morning trading, Goldman shares sank $22.30, or 12.1 percent, to $161.97 on the New York Stock Exchange. Other bank stock also fell.

GOLDMAN HID INFORMATION, SEC SAYS

In its lawsuit, the SEC alleged that Goldman structured and marketed a synthetic collateralized debt obligation, ABACUS, that hinged on the performance of subprime residential mortgage-backed securities.

It alleged that Goldman did not tell investors "vital information" about ABACUS, including that Paulson & Co was involved in choosing which securities would be part of the portfolio. It also alleged that Paulson took a short position against the CDO in a bet that its value would fall.

According to the SEC, the marketing materials for the CDO showed that a third party, ACA Management LLC, chose the securities underlying the CDO.

Paulson & Co paid Goldman $15 million to structure and market the CDO, which closed on April 26, 2007, the SEC said. Little more than nine months later, 99 percent of the portfolio had been downgraded, the agency said.

"In sum," the complaint said, "Goldman Sachs arranged a transaction at Paulson's request in which Paulson heavily influenced the selection of the portfolio to suit its economic interests, but failed to disclose to investors ... Paulson's role in the portfolio selection process or its adverse economic interests."

(Reporting by Jonathan Stempel, Maria Aspan, Clare Baldwin, Elinor Comlay, Steve Eder, Matt Goldstein, Jeremy Pelofsky, Aaron Pressman, Dan Wilchins, Karey Wutkowski and Rachelle Younglai; Editing by Robert MacMillan and John Wallace)

http://www.sec.gov/litigation/complaints/2010/comp-pr2010-59.pdf

BAN CDS!

18. At the same time, GS&Co recognized that market conditions were presenting
challenges to the successful marketing of CDO transactions backed by mortgage-related securities. For example, portions of an email in French and English sent by Tourre to a friend on January 23, 2007 stated, in English translation where applicable: “More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab[rice Tourre]…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!” Similarly, an email on February 11, 2007 to Tourre from the head of the GS&Co structured product correlation trading desk stated in part, “the cdo biz is dead we don’t have a lot of time left.”

http://seekingalpha.com/article/197669-cramer-s-stop-trading-classic-goldman-4-7-10

Cramer thinks Goldman Sachs' (GS) letter denying it betted against clients is "classic Goldman." Having worked at the firm and as one of Goldman's clients, Cramer says he doesn't see why there is such widespread hysteria that the bank is constantly trying to "pull the wool over people's eyes" and said "as a client, if they were going against me, I would go over to that guy's house and "explain" a few things to him."

http://vimeo.com/10864430

http://www.youtube.com/watch?v=olVI2ex4wPM

http://blogs.reuters.com/felix-salmon/files/2010/04/30036962-Abacus-2007-Ac1-Flipbook-20070226.pdf

I don't see Paulson mentoined. Looks like fraud.

http://www.opensecrets.org/news/2010/04/us-government-sues-major-political.html

he Securities and Exchange Commission today filed a civil lawsuit against financial giant Goldman Sachs and one of its vice presidents, alleging the company defrauded 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."

By doing so, the government has set its sights on one of the largest wielders of political clout, which has denied any wrongdoing in this case.

People and political action committees associated with Goldman Sachs contributed about $6 million to federal candidates and parties during the 2008 election cycle, according to the Center for Responsive Politics' research, with about three-fourths of that sum supporting Democrats. These investments, along with about half-a-million dollars to state-level candidates, rank the firm as the 47th largest political contributor for the cycle.

Employees of Goldman Sachs contributed nearly $1 million to the $750-million-strong presidential campaign war chest of Barack Obama -- making him the top federal recipient of money from Goldman Sachs during the 2008 election cycle and making employees of the company his largest private sector financial backer.

So far this election cycle, Goldman Sachs' PACs and employees have contributed $693,675 to federal candidates and parties, with about 70 percent of that total supporting Democrats, the Center has found.

The investment bank has also been a major lobbying force. Last year, it spent $2.8 million on lobbying, down from about $3.4 million in 2008. Among its top concerns have been issues dealing with taxes, finance and banking.

Goldman Sachs was one of major banks to receive financial assistance from the U.S. government through the Troubled Asset Relief Program (TARP) fund, through which it secured a $10 billion loan -- which it repaid last year, generating taxpayers $1.4 billion in revenue.

Additionally, a number of high-ranking government officials in recent years have spent part of their careers at Goldman Sachs. It is one of the top organizations to see employees pass through the so-called revolving door between the public and private sectors. By the Center's count, at least 21 current or former Goldman Sachs employees have been through the revolving door (earning them profiles in the OpenSecrets.org Revolving Door database).

These revolvers include one of President George W. Bush's secretaries of the Treasury, Henry Paulson, who was the chief executive officer of Goldman Sachs, and one of President Bill Clinton's secretaries of the Treasury, Robert Rubin, who was a co-chairman of Goldman Sachs.

The lawsuit comes at a time when Congress is working to pass legislation designed to reform the U.S. financial system and add new layers of oversight and consumer protection. The House adopted its version of financial reform in December, and the Senate Banking Committee moved a bill by Chairman Chris Dodd (D-Conn.) to the Senate floor last month.

President Barack Obama has also threatened to veto any financial regulatory reform bill that does not include strong regulation of derivatives, the financial products through which investors often made risky bets -- like those detailed in the SEC lawsuit.

http://www.google.com/hostednews/ap/article/ALeqM5jYPCbXg-t_Mbomz9EgxOTEZZ7nggD9F5M0T82

LONDON — Goldman Sachs is facing a potential backlash in Europe over the fraud case brought against it in the United States, with Britain's Prime Minister Gordon Brown calling for authorities there to investigate and accusing the investment bank of "moral bankruptcy."

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Even if Goldman beats the SEC they lose. And how many European banks were at the losing end of Goldman deals?

Riversider, now that you've played with yourself 8x in a row, plz tell me you've ejaculated into a tissue and will not be posting/playing with yourself. Man, give yourself some refraction time dude!

Hey, Riversider, are you going to use up all the thread or are you going to save some room for the rest of us?

Be nice. riversider is clearly an ex-employed wall streeter -- let him vent his anger about the GS ranks making money when he is not! It is healthier than drinking and other activities...

http://www.huffingtonpost.com/vicky-ward/senior-goldman-exec-is-ma_b_542154.html

The claims against GS seem weak. The investors were sophisticated and it seems like they had all the information they needed to evaluate the investment they made. I'm sure they signed a letter saying they had all the information they needed, and that they understood GS might be betting the other way.

"President Barack Obama has also threatened to veto any financial regulatory reform bill that does not include strong regulation of derivatives"

lets hope NobamaS keeps his word on that one

it all hinges on what they meant by ACA selecting the assets. Goldman highlighted ACA'S role quite proimently. Think back to Madoff. The feeder hedge funds highlighted their auditor and didn't mention that Madoff had a two man auditing shop. Goldman is arguing that in swaps the parties are kept anonymous. Seems in a CDO deal they should be identifying the interested parties. Regardless Goldman is suffering reputational risk which is far worse than any SEC action.

this is merely good PR for GS..

so the public will lay down their imaginary arms, go back to their plebeian roles, forget about it in a year, while GS will continue to boost record bonuses while slipping DC their crumbs to keep the good media going. well played.

As I said elsewhere - I know huffpost readers are REALLY excited about this Goldman stuff but lets be clear - under EXISTING law, what GS did was apparently illegal, per the SEC. Ergo it has 0.00% to do with PROPOSED legislation. Nothing in any of the proposed bills in congress or in EU regulations has anything whatsoever to do with this Goldman case. Its straight, old fashioned fraud, illegal since the 1930s. So to somehow say this is an argument for why we should pass financial reform is plain silly. It would not be MORE illegal under the Senate or House bills. Any more than the health care bill made medical malpractice more illegal.

The GS case seems like an excellent example of how financial reform could be helpful. The problem isn't what GS did, it's that banks were sinking a billion dollars into subprime mortgages.

The issue hinges on whether Goldman had a fiduciary responsibility to the buyers. They'll probably argue they don't. The Abacus was sold to people deemed sophisticated investors, and I believe but am not 100% sure there's a distinction between advisiong a firm on a leveraged buy-out and selling a client a bond.

http://www.nytimes.com/2010/02/16/business/16adviser.html?pagewanted=1

The insurance industry, in particular, has been fighting the requirement. In addition, Senator Tim Johnson, Democrat of South Dakota, is considering whether to recommend a study of the brokerage and adviser industries, a move that consumer advocates say would wipe out the proposed requirement.

“The intent of this amendment is not to improve investor protections, but to delay and deflect meaningful reform,” said Barbara Roper, director for investor protection at the Consumer Federation of America.

At issue is whether brokers should be required to put their clients’ interest first — what is known as fiduciary duty. The professionals known as investment advisers already hold to that standard. But brokers at firms like Merrill Lynch and Morgan Stanley Smith Barney, or those who sell variable annuities, are often held to a lesser standard, one that requires them only to steer their clients to investments that are considered “suitable.” Those investments may be lucrative for the broker at the clients’ expense.

Over the years, it has become more difficult for consumers to understand where their advisers’ loyalties lie, especially as the traditional stock-peddling brokers have started to look and act more like financial advisers. The fact that some brokers can wear two hats with the same client — that is, provide advice as a fiduciary in one moment, but recommend only “suitable” investments in the next — only adds to the confusion, experts said.

So as part of the more sweeping effort to overhaul Wall Street, both houses of Congress included measures that would subject brokers to the tougher standard. On the surface, both the brokerage and financial planning industry appear to agree that advisers of all stripes should be subject to a consistent fiduciary standard. But behind the scenes, the groups are divided on how exactly it should work, while the insurance industry is opposed to a fiduciary standard altogether.

“Brokers would love to be called fiduciaries,” said Tamar Frankel, a professor at Boston University School of Law. “That is not the issue. The issue is what stands behind it.”

The study being considered by Senator Johnson would examine the gaps and overlaps in regulation within the brokerage and adviser industries. Consumer groups say the issue has already been examined, most recently in 2008, when the Securities and Exchange Commission asked the RAND Corporation, a nonprofit organization, to study the business practices of broker-dealers and investment advisers. The study found that investors had trouble distinguishing among industry professionals.

A spokesman for Mr. Johnson said a study was on the table, but that it was still early in the process. “There certainly has been some concern raised on how to appropriately harmonize the fiduciary standard for investment advisers and broker-dealer to eliminate consumer confusion,” Jeff Gohringer, the spokesman, said. “And Senator Johnson is looking for ways to address it.”

The debate over brokers’ responsibility to their clients and how much they have to disclose has been evolving since the Depression, as Congress and the courts have weighed in.

The first efforts to regulate financial professionals came in 1934 and 1940, with first the Securities Exchange Act and then the Investment Advisers Act, which set out rules for brokers and advisers. The advisers were held to the stricter fiduciary standard. But the 1940 law made an exception for brokers: as long as their advice was “solely incidental” to their service as a broker, and they did not receive special compensation for advice, they were not required to act as fiduciaries. Instead, they must provide only “suitable” investments.

“Consumers are generally not aware that there are these different standards,” said Daniel J. Barry, director of government relations for the Financial Planning Association, an advocacy group for the advisers’ industry.

The planners, along with consumer advocates, support the proposal in the original draft of the Senate financial reform bill by Christopher J. Dodd, the Connecticut Democrat who is chairman of the Senate Banking Committee. That proposal would simply erase the brokers’ exemption from the Investment Advisers Act and require them to register as advisers, making them fiduciaries.

“The Dodd bill is broader and stronger,” said John C. Coffee, a professor of securities law at Columbia Law School. “In the full-scale House bill, you see how limited it is. The House makes a new limited fiduciary standard to broker dealers, but only when they are giving personalized investment advice” about securities to a retail customer.

Consumer advocates say the phrase “personalized investment advice” leaves too much room for interpretation. What is more worrisome, they say, is that the House version would also not require brokers to “have a continuing duty of care or loyalty to the customer” after providing that advice. That could lead to “hat switching,” they say, where the broker wears his fiduciary hat when giving advice, but changes to the suitability hat when recommending products.

"The GS case seems like an excellent example of how financial reform could be helpful. The problem isn't what GS did, it's that banks were sinking a billion dollars into subprime mortgages."

Not really. Not in the slightest. yes reform is needed and investible. I think the House bill and the EU proposals are just fine, and for anyone to claim that the EU or Barney Frank are somehow to the RIGHT of the Senate is plain silly.

But NOTHING in any of the bills on either side of the atlantic have anything whatsever to do with what Goldman did. So your claim is coming from out of your rear end. Their were no subprime mortgages - it was a synthetic CDO. Nothing in the bills would change anything about how GS does such deals.

However, EXISTING law does in fact say what they did is illegal. I find it laughable that so many conflate the two.

"Their were no subprime mortgages - it was a synthetic CDO."

You should write a letter to the Wall Street Journal, because their articles are erroneously reporting that the CDO was "built out of a specific set of risky mortgage assets."

looks pretty damming.

http://dealbook.blogs.nytimes.com/2010/05/04/debate-flares-on-goldmans-role-as-market-maker/

Goldman Sachs insists that it did nothing wrong and was just acting as a middleman when it sold billions of dollars of securities that are at the center of the Securities and Exchange Commission’s fraud case against the firm. But John C. Coffee Jr., a professor of securities law at Columbia University, told a Senate hearing on Tuesday that Goldman was much more than a middleman and that it therefore had a duty to its clients that went beyond just filling orders.

“Goldman was not a neutral dealer, but a soliciting placement agent,” Mr. Coffee told a Senate Judiciary subcommittee. “Acting as a placement agent for a securities offering that one has itself designed is very different from a dealer simply quoting a two-sided spread.”

Goldman has argued that it was a market maker in credit derivatives business and that it was just helping firms that wanted to buy a synthetic collateralized debt obligation meet up with those that wanted to bet against it.

Goldman’s chief executive, Lloyd C. Blankfein, was almost apoplectic in trying to explain the firm’s role in the matter to Charlie Rose in a rare interview last week. When asked if the firm ever took the opposite side of a trade that it had advised its clients to take, Mr. Blankfein seemed dumbfounded.

“As a market maker, we are making buying and selling a thousand times a minute, probably,” Mr. Blankfein responded. “Advising is where people are coming to us for advice — people are asking us our opinion, where we have an obligation and duty,” he continued, attempting to illustrate the differences between the firm’s market-making activities and its advising business.

When acting as a market maker, Mr. Blankfein said Goldman’s clients “are not asking us for our opinion, we are not providing, we are simultaneously sell, buy, sell, buy.”

Therefore, by just bringing sellers and buyers together, Goldman insists that it did not have any duty, moral or legal, to disclose to its clients that a portfolio of synthetic C.D.O.s, had been built, at least in part, by another Goldman client, the hedge fund manager John A. Paulson, who the S.E.C. said was on the other side of the trade.

Mr. Coffee took issue with Goldman’s explanation, calling it a “straw man argument.” He argued that the firm was much more than a market maker in this case. By actively marketing the portfolio, Goldman owed its clients taking the long side of a synthetic C.D.O. the same level of care that they would get if they were buying a real C.D.O. made up of actual mortgages.

“Put simply, this is why they came to Goldman: for its expertise and skill,” Mr. Coffee said, referring to the clients that went long on the portfolio. “That the C.D.O. was instead a synthetic one and thus inherently involved a short side, and a credit default swap, changes nothing; the investor in the synthetic C.D.O. should continue to be able to expect that Goldman is seeking attractive securities, not dogs, to place in its portfolio.”

Goldman maintains that it lost about $100 million in the transaction at the center of the S.E.C.’s fraud case, showing that it did not have an incentive for the portfolio to fail.

Mr. Coffee rejected that argument. “The fact that Goldman lost money on the deal was because it could not sell out its offering,” he said. “And so like an unsuccessful underwriter, it had to absorb the weak securities that it could not sell.”

As an underwriter, Goldman would therefore have an obligation to disclose all pertinent information about the offering to its clients.

“Goldman should not have permitted one client to bias the deal in its own favor,” Mr. Coffee said. “Nor should it have represented that a neutral and objective portfolio manager was selecting the portfolio if it knew that the short side was heavily influencing the selection of the securities in the portfolio.”

http://www.senate.gov/fplayers/CommPlayer/commFlashPlayer.cfm?fn=judiciary050410&st=xxx

http://judiciary.senate.gov/pdf/10-05-04CoffeesTestimony.pdf

Hello

I thought it interesting that Paulson isn't that smart apparently when he's not getting help from Goldman. He apparently lost a few shekels in a Chinese fruad..

http://www.bloomberg.com/news/2011-06-21/paulson-dumping-sino-forest-may-deal-clients-720-million-loss.html

John Paulson’s $37 billion hedge fund sold its entire stake in Sino-Forest Corp. (TRE), the Chinese tree-plantation owner accused of overstating timber holdings, dealing investors a potential C$705 million ($720 million) loss.

Paulson & Co., which held 34.7 million shares of Sino- Forest as of April 29, said in a filing yesterday that it had disposed of the stake as of June 17. The New York-based firm’s holding was worth C$815.80 million when it was disclosed. Its value had dropped to C$110.69 million by the end of last week.

The investment is a public misstep for Paulson, 55, who’s betting on an economic recovery after making $15 billion for his backers in 2007 wagering against subprime mortgages. His largest fund lost about 13 percent in the first half of June, bringing declines this year to about 20 percent, as bets on Sino-Forest and U.S. bank stocks soured, two investors said last week.
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On a side note one can't read the stories about Chinese equities these past few months and come to suspect that fraud is rampant in the Chinese stock market. Longtop Financial comes to mind. I'm sure there are others.

"making $15 billion for his backers in 2007 wagering against subprime mortgages."

with all due respect to paulson and the messieurs goldman, even this civilian who was very pregnant and out of touch at the time could have connected those dots (in retrospect, of course). getting one's hands dirty in the real world where everthing is not as simple as cause----->effect, and things other than formulas dictate discourse, sometimes gets messy. damn furners. can't trustem.