SEC, Goldman to face off on saving reputation

Contrary to what is being speculated in certain quarters, analysts discount the possibility of the civil lawsuit filed by US security regulator, Securities and Exchange Commission (SEC) against Goldman Sachs Group from the sale of a security linked to subprime mortgages, leading to more such actions.

The say the case lodged by the Securities and Exchange Commission against Goldman and a 31-year-old bond salesman may prove to be more rare than initially believed, if the legal documents in the matter were to be read closely.

On Friday, Goldman and Farbrice Tourre were charged with not disclosing to institutional investors that the hedge fund giant Paulson & Co had an economic interest in seeing the security perform poorly. The company also played a role in helping to put the deal together.

In other words, according to the SEC, the security, Abacus 2007-AC1, was designed to fail and the investors were kept in the dark as they bet the US residential housing market was not on the verge of collapse in early 2007.

Last September, the SEC informed Goldman lawyers that one reason they singled out the Abacaus 2007 deal was because other investment banks selling so-called synthetic collateralised debt obligations (CDO) had told their customers that a hedge fund betting against the deal may have played a role in arranging the security, according to a legal filing Goldman submitted to regulators last fall.

According to Goldman lawyers, it was not common practice for investment banks to tell potential customers a hedge fund might be shorting a deal and also selecting underlying portfolio of mortgate-backed securities.