The Securities and Exchange Commission has filed a Civil Suit alleging Fraud against Goldman Sachs and one of its Officers, one Fabrice Tourre. Download S.E.C. v. Goldman Sachs and Fabrice Tourre (S.D.N.Y. Case No. 10 Civ. 3229 Complaint Filed 04.16.10). Here is the SEC's Press Release describing its Complaint: Download Press Release.041610.SEC Charges Goldman, Sachs With Fraud in Connection With the Structuring and Marketing of a Synthetic CDO.
The filing of this lawsuit has set off a tremendous number of newspaper reports from Coast to Coast, and across the world, every day since Friday when the SEC filed its lawsuit, down through the morning of this post. E.g., Joshua Gallu & Christine Harper, "Goldman Sachs Sued by SEC for Fraud Tied to CDOs (Update 4)" (Bloomberg.com, Friday, April 16, 2010); Walter Hamilton & Nathaniel Popper, "SEC Targets Goldman Sachs With Fraud Suit" (latimes.com, Saturday, April 17, 2010); Gretchen Morgenson and Landon Thomas, Jr., "A Glare on Goldman, From U.S. and Beyond" p. B1, col. 5 (New York Times Nat'l ed., "Business Day" Section, Monday, April 19, 2010); Aline van Duyn, "Regulator's Move Risks Opening Lawsuit Floodgates" (FT.com, Sunday, April 18, 2010).
The SEC's lawsuit is not based on the inherent characteristics or the very nature of Collateralized Debt Obligations (CDOs). It is based instead on a Claim of Fraud in the use of a CDO. The CDO involved in the SEC's Lawsuit was called Abacus. Goldman Sachs allegedly invented it and invited people, for a premium, to invest in it. It was allegedly devised for the purpose of failure. A billionaire client of Goldman Sachs selected the investment securities (tied to subprime mortgages) that would go into Abacus. He then bet against the securities that he selected. And made more billions. The Abacus investors allegedly did not know that Goldman's client selected the securities which Goldman invited them to invest in; in fact, allegedly Goldman told the Abacus investors that an impartial/disinterested third party selected the securities.
After Goldman's client selected the subprime mortgage securities to be placed inside the Abacus CDO, Goldman arranged for its billionaire client to insure them with Credit Default Swaps (CDSs), or credit insurance policies, which is how the client bet against the securities that the client selected. Goldman Sachs allegedly also received a Premium for this form of Credit Insurance. The insurers? AIG and parties still unknown, but perhaps not unknown for much longer. Simply put, when Abacus failed, Goldman's billionaire client received more billions from the payout of the Credit Default Swaps.
Thus, the SEC lawsuit is underpinned by Fiduciary Standards of liability and behavior, i.e., Full Disclosure and No Self-Dealing. Timely concepts for the SEC and other Regulators to enforce. When those and similar Fiduciary Duties are not enforced, a Great Collapse is the present result -- and will be again if behaviors are not changed.
A post on the SEC Lawsuit and Fiduciary Duties is on the Insurance Claims and Issues Blog of Sunday, April 18, 2010.
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