The SEC filed a complaint with the
United States District Court for the Southern District of New York on April 16, 2010 against
GS&Co. and Fabrice Tourre, an employee of GS&Co. The complaint charged the defendants with securities fraud regarding their synthetic collateralized debt obligation (CDO). The synthetic
CDO in question was ABACUS, tied to subprime residential mortgage-backed securities. The
SEC alleged that GS&Co. misrepresented the role ACA Management LLC ("ACA") played in selecting the CDO's reference portfolio.
Background on involved parties •
Goldman, Sachs & Co.: A prominent leader in the global financial services sector. Founded in 1869, the firm's main headquarters are in New York, NY and they have offices globally. GS&Co. is the second largest investment bank in the world and they are known for their wealth management services and proprietary trading. •
Paulson & Co.: An investment banking firm that specializes in small to mid-cap markets. It was founded in July 1994 as an employee-owned fund based in New York, NY. Paulson & Co. was run by John Alfred Paulson until the company became private in 2020 and focused on managing family money. • ACA Management LLC: The asset managing division of the bond insurer ACA Capital Holdings. At the time of this event, ACA managed 22 CDOs with $16 billion in underlying assets. ACA had another subdivision called ACA Financial Guaranty, which benefited from their involvement in the deal by selling protection on the transaction. •
IKB Deutsche Industriebank (IKB): A bank that is based in Düsseldorf, Germany, specializing in loans to small and medium-sized companies for more than 90 years. Tourre, an employee of GS&Co. in their NYC office was the main architect of the ABACUS CDO according to the SEC. Tourre was the point of contact for investors in regard to the CDO and was responsible for curating the marketing materials which misinformed investors. It is believed he was aware of Paulson's role in regard to the RMBS portfolio and their desire to short it. In addition, it is believed Tourre explicitly informed ACA that Paulson invested about $200 million into ABACUS which implies that Paulson was taking on a long position. Tourre also allegedly informed ACA that Paulson's investment interests aligned with ACA's. The deal was finalized on April 26, 2007. GS&Co. profited $15 million from Paulson for preparing and advertising the ABACUS CDO. On October 24, 2007, 6 months after the deal was closed, 83% of the RMBS in the portfolio were downgraded and 17% of the RMBS were on negative watch. By January 2008, 99% of the portfolio had been downgraded. This resulted in investors losing over $1 billion, while Paulson's short position garnered them $1 billion in profit.
Outcome GS&Co. and Tourre were found guilty of violating Section 17(a) of the Securities Act 15 U.S.C. 77q(a) and 78j(b), Section 10(b) of the Securities Exchange Act and Exchange Act rule 10b-5, 17 C.F.R. 240.10b-5. $250 million of the fine was paid out to the investors who lost money on the deal, while the remaining $300 million went to the US Treasury. GS&Co. admitted guilt and accepted that their marketing materials provided "incomplete information". The SEC viewed ACA as a victim in the deal, stating they were misled by GS&Co. This resulted in no legal repercussions for them, although ACA was able to benefit from the partnership. == Impact ==