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SEC v. Goldman Sachs could brush against CUs
WASHINGTON (4/20/10)--The U.S. Securities and Exchange Commission (SEC) late last week charged Goldman, Sachs & Co. and its vice president, Fabrice Tourre, with “defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter.” In its complaint, the SEC “alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS)” and “failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.” Specifically the SEC has claimed that hedge fund Paulson & Co. “paid Goldman Sachs to structure a transaction in which Paulson & Co. could take short positions against mortgage securities chosen by Paulson & Co. based on a belief that the securities would experience credit events.” Essentially, the SEC is alleging that the financial product produced by Goldman Sachs was designed to fail so that Paulson & Co would benefit by betting against it. According to the SEC, Goldman Sachs told its investors that ACA Management was in charge of the portfolio, while, in fact, Paulson & Co., a hedge fund, was selecting the individual bonds that it was betting against. The end product, which was known as ABACUS, netted Goldman Sachs $15 million in fees from Paulson & Co., while individual investors in ABACUS “are alleged to have lost more than $1 billion,” according to SEC estimates. In a statement, Goldman Sachs said that the SEC charges “are completely unfounded in law and fact” and that the firm will “vigorously contest them and defend the firm and its reputation.” Late last week said that the SEC would look at “deals with similar profiles or any deals where disclosures were not properly made.” It is unclear whether this litigation will have any bearing on the undervalued assets of corporate credit unions, and the Credit Union National Association will be watching the developments closely for implications that could be used to support an increased valuation of the corporates' undervalued assets.


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