Goldman Sachs Group Inc. (GS) and Basis Capital’s Basis Yield Alpha Fund have reached an agreement to settle the $1B collateralized debt obligation fraud lawsuit brought by the Australian hedge fund against the bank several years ago. The Basis Yield Alpha Fund accused Goldman Sachs of making false statements related to its marketing of the Timberwolf, a mortgage-linked investment, and the Point Pleasant collateralized debt obligation (CDO). (The Timberwolf investment was named in the 2011 U.S. Senate report that found that Goldman misled clients about mortgage-backed securities.)
The Australian hedge fund, in its complaint, claimed that Goldman falsely claimed that the market for CDO investments had become stable even though it knew that was not the case. These particular securities dropped in value within weeks of purchase by the fund.
The Basis Yield Alpha Fund is convinced that Goldman sold the securities to rid itself of the toxic subprime mortgages while making money by shorting the securities. The fund sought repayment of over $67M it claims was lost by investing in the collateralized debt obligations, as well as $1B in punitive damages. Goldman, which argued that the fund’s losses were caused by the demise of the housing market and not because of any alleged misrepresentations, claimed that the Australian hedge fund filed its CDO fraud lawsuit to try to get the bank to pay these losses.
A federal judge had previously dismissed the case but the Basis Yield Alpha Fund then went to state court to sue Goldman. A judge denied the firm’s next attempt to get the complaint thrown and an appeals court upheld that decision two years ago.
Goldman Sachs Settles Suit Over CDO That Became Crash Symbol, Bloomberg, June 14, 2016
Goldman Settles Mortgage Suit with Australian Hedge Fund, MSN.com, June 6, 2016