Goldman Sachs Contests SEC Charges

Goldman Sachs issued two back-to-back statements Friday afternoon in response to the Securities and Exchange Commission's (SEC) blockbuster announcement that it was suing the New York firm over allegations that it defrauded investors.

The first statement was brief, saying only that the SEC's charges are ‘completely unfounded in law and fact’ and pledging to ‘vigorously contest them and defend the firm and its reputation.’

The company's second statement, released shortly after the first, was much more expansive, placing focus on what Goldman Sachs calls ‘four critical points’ that were missing from the SEC's complaint:

  • Goldman lost more than $90 million on the Abacus transaction – the synthetic collateralized debt obligation (CDO) at the heart of the complaint, the firm says.
  • The deal's two investors, IKB and ACA Capital Management, were provided extensive information about the underlying mortgage securities, Goldman Sachs says. "The risk associated with the securities was known to these investors, who were among the most sophisticated mortgage investors in the world," the firm's statement explains. "These investors also understood that a synthetic CDO transaction necessarily included both a long and short side."
  • ACA, which had a $951 investment in the Abacus deal, selected the portfolio. An independent agent held a series of discussions pertaining to the transaction, including talks with Paulson & Co. The SEC alleges that unbeknownst to investors, the Paulson hedge fund – which went short on the investment and stood to benefit if the residential mortgage-backed securities (RMBS) defaulted – played a "significant role" in selecting which RMBS should make up the portfolio. Goldman says ACA had "an obligation and every incentive to select appropriate securities."
  • Goldman Sachs never represented to ACA that Paulson was going to be a long investor. The SEC's complaint accuses the firm of fraud because it didn't disclose to one party of the transaction who was on the other side of that transaction. As normal business practice, market makers do not disclose the identities of a buyer to a seller and vice versa, Goldman says.

Also in its statement, Goldman says that offering documents for the transaction included every underlying mortgage security and satisfied SEC requirements.

SOURCE: Goldman Sachs


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