Goldman Sachs Group Inc. (GS) has arrived at a settlement with ACA Financial Guaranty Corp. The bond insurer’s securities fraud lawsuit accuses the investment bank of fraudulently persuading it to guarantee payments on the , a collateralized debt obligation, prior to the financial crisis. ACA Financial Guaranty claims that Goldman and hedge fund Paulson & Co. fooled it into insuring the CDO. Details of the CDO fraud settlement have not been disclosed.
In its $120M CDO fraud case, ACA claimed it was deceived into thinking that Paulson & Co. would hold Abacus for the long-term, when, in fact, the fund played a part in choosing the CDO’s assets before taking a short position and bet that the mortgages underlying the securities would fail. ACA alleged that Abacus was set up in a manner to allow Paulson to make “huge profits” and Goldman to earn “huge fees.”
Although a NY judge had said that the case, brought in 2011, could proceed, an appeals court reversed that decision in 2013. The New York Supreme Court reversed the appeals court’s ruling in 2015.
A report issued by the U.S. Senate Permanent Subcommittee on Investigations a few years ago stated that three investors collectively lost approximately $1B from investing in Abacus, while Paulson & Co. made about that same amount. In 2010, Goldman settled civil charges with the U.S. Securities and Exchange Commission related to this subprime mortgage CDO for $550M. The firm also admitted that its marketing materials for the Abacus CDO lacked certain information.
The SEC had accused the investment bank of leaving out and misstating key facts about the CDO and not disclosing “vital information” about the security to investors—especially the fact that Paulson’s hedge fund played an important role in choosing what would go in the CDO’s pABACUS 2007-AC1ortfolio, as well as that he was taking a short position against the collateralized debt obligation. Of the $550M, $250M was for investors who were harmed.
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Goldman, Paulson, Settle Fraud Lawsuit Over Abacus, Reuters, November 3, 2016