SEC Brings Securities Fraud Action against Goldman Sachs in Connection With the Creation and Sale of Subprime CDOs
The United States Securities Exchange Commission (SEC) today brought a securities fraud action against Goldman Sachs and one of its vice presidents, accusing them of misstating and omitting key facts about a financial product tied to subprime mortgages it sold as the housing market was showing signs of distress.
The financial product at issue is a synthetic collateralized debt obligation (CDO) called ABACUS 2007-ACI, which was tied to the performance of subprime residential mortgage-backed securities. ABACUS was structured and marketed by Goldman Sachs.
According to the SEC’s complaint, Goldman Sachs failed to disclose material information about the CDO, specifically that a major hedge fund had taken a short position against the CDO (meaning it gained to benefit if the underlying mortgages defaulted) and that this same hedge fund was also involved in the portfolio selection for the CDO. In other words, Goldman Sachs did not disclose the hedge fund manager’s role in the portfolio selection process or its conflicted interest. To the contrary, Goldman Sachs told investors in ABACUS marketing materials that the CDO would be selected by an independent manager.
According to the SEC, investors in the ABACUS mortgage securities are alleged to have lost more than $1 billion.