BREAKING: Goldman Charged with Fraud

Eddie Braverman's picture
Rank: The Pro | 21,111

The SEC has filed suit against Goldman Sachs, charging the firm with fraud in relation to the subprime mortgage crisis. Specifically, the SEC is alleging Goldman sold securities purposely designed to fail.

"The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, Director of the Division of Enforcement. "Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party."

The charges relate specifically to the Abacus class securities. Here's extensive coverage by the New York Times:

http://www.nytimes.com/2010/04/17/business/17goldm...

Comments (67)

Apr 16, 2010

I'm interested to hear what people on the street think about this...it sounds like a witch hunt to me, and though mistakes have been made (if the allegations are true) it's just another liberal media attack on Wall Street and banking.

I guess I'm not sure how much this really impacted the crisis......from what I'm reading it sounds like a small unethical decision, that will surely be amplified by the media.

Apr 16, 2010

This reminds me of the two Bear Stearns guys who got in trouble back in 07.

Apr 16, 2010

Paulson is FUCKED

Apr 16, 2010
monkay:

Paulson is FUCKED

You must be talking about Hank, because John Paulson wasn't charged. I'm not even sure he committed a crime (unless taking advantage of the corruption inside Goldman is a crime). Paulson just put together his dream short portfolio (which ended up having 99% of the assets downgraded - HUGE PLAY). It was Goldman that told people they were selected by an independent 3rd party with no vested interest in seeing the investors take it in the tailpipe.

Apr 16, 2010

Beat me to it.

Apr 16, 2010
monkay:

Paulson is FUCKED

No, Paulson did absolutely nothing illegal. Unethical? Yes... but not illegal. This is a disclosure issue and Goldman is the one who's really in trouble.

Apr 16, 2010

Even if it didnt impact the crisis it completely undermines Goldman's reputation, which is horrible because most of the people who run our economy are ex-goldman employees...who were chosen from the 'best' financial institution.

Apr 16, 2010

Looking at my PA, when the news hit at about 10:45 GS dropped from 181-165 in a matter of 15 minutes, over 18% of it's total value, it's peak ROC during the fall was -9 for a minute chart. (I.e there was a point where people were selling so fast that at the rate GS would be worth $0 in 18.33 minutes if that rate kept up).

Volume up to 10:30 was about average, around 5M rough estimation....total Vol on the day is now over 24 M meaning roughly 18 M shares have moved in under 45 minutes.

Buy cheap or short?

Apr 16, 2010

Why would paulson be fucked?? He didn't do anything illegal from I've read. All he did was ask Goldman to create an instrument containing subprime loans so he could be against it a la the CDS that Michael Burry bought.

Apr 16, 2010

Depending on how this effects Paulson image, this could be huge for the markets. He has a large amount of his fund tied into gold and gold stocks like the GLD. Pending redemptions and whatnot, there is a chance Paulson may have to unload some gold, which would flood the market.

Thoughts?

Apr 16, 2010

Sounds like a witch hunt to me.

"I do not think there is any other quality so essential to success of any kind as the quality of perseverance. It overcom

Apr 16, 2010

I still dont think it would hurt his image. He was smart enough to see this coming and simply asked anybody willing to create something for him to bet against. It's not his fault so why would his image be hurt?

Apr 16, 2010

Are any big hitters short GS that you know of Edmundo? Long financials was THE trade of 09.

Apr 16, 2010

True I jumped the gun on the Paulson thing after seeing it in the SEC report

Apr 16, 2010

I don't think it pays to short Goldman in the long run.

Evil is eternal.

Apr 16, 2010

How will this affect Goldman SAs and FTs?

Apr 16, 2010
TheSouthpaw:

How will this affect Goldman SAs and FTs?

It won't, they will can the guy who structured the CDO and he's the only one that would be impacted pending the SEC not turning up anything else in discovery.

Also, the filing just hit my PA:

SEC:

Tourre was principally responsible for ABACUS 2007-AC1. Tourre devised the transaction, prepared the marketing materials and communicated directly with investors. Tourre knew of Paulson's undisclosed short interest and its role in the collateral selection process. Tourre also misled ACA into believing that Paulson invested approximately $200 million in the equity of ABACUS 2007-AC1 (a long position) and, accordingly, that Paulson's interests in the collateral section process were aligned with ACA's when in reality Paulson's interests were sharply conflicting

What an ass, the market is absolutely plummeting, a complete nightmare right now.

Apr 16, 2010

But how else was Paulson going to place his bets? Someone else had to take the other side of his trade, and they sure as hell wouldn't have done so if Goldman had said "here, take these securities which some HF manager is betting will fail."

I guess the corollary is that without middlemen like GS, the returns from HFs like Paulson's probably wouldn't have been as stellar.

Apr 16, 2010
chewingum:

But how else was Paulson going to place his bets? Someone else had to take the other side of his trade, and they sure as hell wouldn't have done so if Goldman had said "here, take these securities which some HF manager is betting will fail."

I guess the corollary is that without middlemen like GS, the returns from HFs like Paulson's probably wouldn't have been as stellar.

So if you were betting on a sporting event, and I told you I am hiring a hitman to take out the star player the night before. Would you take the bet on?

Does not matter what Paulson wants to do this in world, if he can't get someone to bet against him he should not. Goldman deceived clinets into thinking it was a fair bet to reap the commisions from Paulson's winnings.

Apr 16, 2010

Goldman was probably laughing when they sold CDSs to Michael Burry.. at least at first. It's probably impossible to know at which point GS realized that Burry, Paulson and co. were on the right side of that trade.

Apr 16, 2010

the sec is just doing this to appease the populists who think they are incompetent. Turn on any news channel tonight and you will see this, and for some time after as well.
Will be interesting to see how it plays out.

Apr 16, 2010

They were laughing the whole time...because once they found out what was really happening they dumped them on the idiots at A.I.G. This Toure guy should start a HF with Ralph Cioffi.

Apr 16, 2010

....and not only was there non disclosure, this Tourre guy actually told people Paulson was betting ON the portfolio! That's the part that really gets me

Apr 16, 2010

So basically Goldman is in trouble because they found people to invest in the securities when they knew that the portfolio was created for its securities to decrease in value? Why is that illegal..the people who invested just had a lack of due diligence

Apr 16, 2010
monkay:

So basically Goldman is in trouble because they found people to invest in the securities when they knew that the portfolio was created for its securities to decrease in value? Why is that illegal..the people who invested just had a lack of due diligence

Are you serious? Goldman didn't just stumble across people that wanted in on this RBMS. They actually marketed them to investors through fraud. They blatantly lied by telling them a credit risk expert, ACA Management, selected the securities, when actually it was someone short choosing the securities. They also not only failed to disclose in their tear sheet the short position by Paulson, but actually blatantly lied again by telling them Paulson was long in the portfolio. I realize I use "They", but in fact it looks like this all boils down to one asshole, Fabrice Tourre. Its too bad that one idiot can destroy the reputation of an otherwise honest firm (although that's been up for debate by media as of late.)
The other arguments posted here about GS being a broker dealer and acting on their duty to provide readily accessible securities to investors are irrelevant. Tourre was providing misleading marketing materials-- fraud.

I agree with the rest of you that this is a witch hunt. Obviously this had no material impact on the financial crisis, but blatant fraud like this obviously can't go brushed under the rug. I'm genuinely disappointed in the news.

Apr 16, 2010
I like Tiger better now than B4:
monkay:

So basically Goldman is in trouble because they found people to invest in the securities when they knew that the portfolio was created for its securities to decrease in value? Why is that illegal..the people who invested just had a lack of due diligence

Are you serious? Goldman didn't just stumble across people that wanted in on this RBMS. They actually marketed them to investors through fraud. They blatantly lied by telling them a credit risk expert, ACA Management, selected the securities, when actually it was someone short choosing the securities. They also not only failed to disclose in their tear sheet the short position by Paulson, but actually blatantly lied again by telling them Paulson was long in the portfolio. I realize I use "They", but in fact it looks like this all boils down to one asshole, Fabrice Tourre. Its too bad that one idiot can destroy the reputation of an otherwise honest firm (although that's been up for debate by media as of late.)
The other arguments posted here about GS being a broker dealer and acting on their duty to provide readily accessible securities to investors are irrelevant. Tourre was providing misleading marketing materials-- fraud.

I agree with the rest of you that this is a witch hunt. Obviously this had no material impact on the financial crisis, but blatant fraud like this obviously can't go brushed under the rug. I'm genuinely disappointed in the news.

Great post.

Honestly, I'd find it hard to believe that this is an isolated incident. I'd also find it hard to believe that other firms weren't doing the same sort of shit. This is absolutely disgusting.

Apr 16, 2010
I like Tiger better now than B4:
monkay:

So basically Goldman is in trouble because they found people to invest in the securities when they knew that the portfolio was created for its securities to decrease in value? Why is that illegal..the people who invested just had a lack of due diligence

Are you serious? Goldman didn't just stumble across people that wanted in on this RBMS. They actually marketed them to investors through fraud. They blatantly lied by telling them a credit risk expert, ACA Management, selected the securities, when actually it was someone short choosing the securities. They also not only failed to disclose in their tear sheet the short position by Paulson, but actually blatantly lied again by telling them Paulson was long in the portfolio. I realize I use "They", but in fact it looks like this all boils down to one asshole, Fabrice Tourre. Its too bad that one idiot can destroy the reputation of an otherwise honest firm (although that's been up for debate by media as of late.)

I just had a look through the ABACUS pitchbook and I'm astonished by how much ACA's name is plastered all over it - "$2 Billion Synthethic CDO referencing a static RMBS Portfolio selected by ACA Management, LLC" right on the cover, slides on ACA's business strategy, equity and ownership structure, capital structure, business mix, senior management team, investment philosophy, assets under management and even their freaking org chart!

Apr 16, 2010

I can be like hey you, buy this portfolio because all the big hedge funds are buying it...when they really arent... that isnt illegal

Apr 16, 2010

I wasn't making a judgment on whether what GS did was right or wrong. I was merely remarking that Paulson (and others) probably would not have done as well had they not had middlemen like GS who peddled the other side of the trade to unsuspecting investors.

Sure, what GS did may have been unethical, but whether it's illegal is another story. Hasn't the mantra always been "buyer beware"?

Apr 16, 2010

I can't believe how quick people are to come in here and defend Goldman. Either they have no idea what they are talking about or they literally masturbate to the idea of working on Wall Street. Unbelievable.

Guess this is part of God's work...

Apr 16, 2010

"I can be like hey you, buy this portfolio because all the big hedge funds are buying it...when they really arent... that isnt illegal"

Actually yes it is, it is called fidicuary duty to clients. It is called front-running your clients. It is called conflict of interest by choosing one clinet over another. Furthermore if you read the SEC filing, goldman put in writing these assets were picked a "3rd party". If that is not deception not sure what you think would be...

Apr 16, 2010

The SEC rarely goes after people who commit crimes, they go after people who abuse the trust of Joe Investor and his 3rd tier B-School Grad Portfolio Manager

Plus, I think if you read the filings there has been a previous ruling in favor of the SEC that would make what GS did illegal.

Apr 16, 2010

The indices are on their biggest drop since January.

Apr 16, 2010
maxc:

The indices are on their biggest drop since January.

As is Goldman. This may be the catalyst the bears have been looking for; wonder if we'll close below 11k.

I hope some of you made out like bandits, congrats to the new millionaires today.

Hall of fame material right here...190,000% on the 170's earlier, from $0.01 to $19. Reminds me of AIG.

Those of us who are pros at having things expiring worthless,

Cheers to Eddy if he shorted... http://www.wallstreetoasis.com/blog/fraud-is-in-th...

"Salesmen and traders are wild, cunning, aboriginal creatures who advise money managers about deceiving their bosses and finding new strip bars; their favourite phrase is, "Fuck you." IBankers eat fruit. Salesmen and traders eat meat, preferably fried."

Apr 16, 2010

What kind of punishments can the govt' dish out?

Apr 16, 2010

So what do yoi guys think the penalty would be if they lost? Slap on the wrist?

Apr 16, 2010

Paulson's involvement on helping the construction of these CDO's was written about in The Greatest Trade Ever.....great read btw.

Apr 16, 2010

It will be interesting to see how this pans out. Goldman/Tourre definitely broke their fiduciary duty to clients and seems to have committed fraud. However, so was Cioffi/Tannin and they got let off the hook on all charges.

Apr 16, 2010

Looks like the squid may be getting what it deserved.

I doubt this is a "witch hunt" as many of you are calling it. SEC wouldn't bring on this lawsuit unless they had concrete evidence and were 99% sure they would win if it's taken to trial. If GS took this to trial and won, the SEC would be even more of a laughing stock (hard to imagine I know). No chance this goes to trial though, GS will settle and pay some giagantic fine. At least this will temporarily decrease the value of all those executive stock options.

The legal definition of fraud is as follows:

Fraud is generally defined in the law as an intentional misrepresentation of material existing fact made by one person to another with knowledge of its falsity and for the purpose of inducing the other person to act, and upon which the other person relies with resulting injury or damage. Fraud may also be made by an omission or purposeful failure to state material facts, which nondisclosure makes other statements misleading.

Can anyone honestly tell me that you don't think GS (and many other banks) didn't commit fraud by that definition over the past 5 years? I realize how much some people on here idolize the big banks, but if these banks fradulently cost investors billions of dollars, they should pay the price.

Best Response
Apr 16, 2010

I just heard a rumor. The alleged punishment for GS for their role in this is as follows:

-Every SA offer will be rescinded
-All FT offers will be rescinded

Panic!

Apr 16, 2010
TheKing:

I just heard a rumor. The alleged punishment for GS for their role in this is as follows:

-Every SA offer will be rescinded
-All FT offers will be rescinded

Panic!

Gold.

Apr 16, 2010

Yea, friend of a friend just got an email from HR at Goldman saying all offers for SA's are temporarily rescinded given the recent developments with the SEC.

Screw the market impact, I feel so bad for all you juniors with dreams of models and bottles...completely demolished!

Is it too late to apply to the SEC for an SA position?

Apr 16, 2010

Wait till Cuomo files for a criminal case next week...

Apr 16, 2010

whoever is blaming this on "the liberal media": seriously man? The SEC is bringing this complaint, not the Village Voice. And yes you can say these investors didn't do their due diligence, but GS should have honestly presented what they were buying. There is a difference between investing in some risky assets and investing in risky assets that have been cherry picked by investors as THE worst risky assets.

Apr 16, 2010

i'm all in on goldman sachs bc they are all saints of the lord

Apr 16, 2010

So Steve Liesman says that Pellegrini was the SEC source on describing how Paulson helped select the securities that went into these CDOs. I wonder if Pellegrini had a short position on Goldman.

Apr 16, 2010

It is all Fabrice Tourre's fault!!!

Apr 16, 2010

I'd look long and hard at the Apr 180/185 calls. Seems like a low risk way to bet GS directionally

Apr 16, 2010
zer0zero:

I'd look long and hard at the Apr 180/185 calls. Seems like a low risk way to bet GS directionally

No, and hell no.

Trying to get out at $0.03? Too bad there's no bid. Take the loss and move on.

"Salesmen and traders are wild, cunning, aboriginal creatures who advise money managers about deceiving their bosses and finding new strip bars; their favourite phrase is, "Fuck you." IBankers eat fruit. Salesmen and traders eat meat, preferably fried."

Apr 16, 2010

Looks like the market thinks there's more to come:

http://online.wsj.com/article/BT-CO-20100416-71083...

Apr 16, 2010

so how did this entire process work exactly. The synthetic part of the CDO means the investors weren't actually taking the Mortgage loans on their books but rather writing CDS on the mortgages to which Paulson's fund bought up?

Apr 16, 2010

halamadrid: "so how did this entire process work exactly. The synthetic part of the CDO means the investors weren't actually taking the Mortgage loans on their books but rather writing CDS on the mortgages to which Paulson's fund bought up?"

short answer: yes.

Paulson helped create the RMBS portfolio with the intention of buying up the swaps on it to effectively short the underlying securities.

Apr 16, 2010

so its a naked position since Paulson doesn't actually have the mortages on the books I'd assume.

I still don't see what is considered unethical on Paulson's part, unless the fund supposedly knew about the "incorrect marketing" undertaken by Goldman. Last I checked Hedge Funds were allowed to short just about anything.

Goldman on the other hand....

Really illustrates that no matter how many top ivy league grads are taken on at financial firms, we are still really just in the business of BS sales.

Apr 16, 2010

It will be interesting to see how this all plays out. I wish though that if anyone, Lehman would have gotten charged for their accounting shenanigans. I'm not trying to defend Goldman here, but let's be serious, they've been a political whipping boy for some time. Check this out: http://www.frontieroutlook.com/?p=480

Apr 16, 2010

edmundo, our resident prophet

Apr 16, 2010

Nonsense, they are just doing God's work!

Apr 16, 2010
copia22:

Nonsense, they are just doing God's work!

God(s) do not exist unless you can do so say or reveal logic to prove his/her existence.

Apr 16, 2010

Their clients are going to be pissed that's all I know. And it doesn't take a rocket scientist to figure out that hurts how much flow they get in the trading side, and how much flow they get on the IB side.

Apr 16, 2010
Apr 16, 2010

I'm sure the boys over at JP Morgan are shaking their heads, Dimon especially. I think it is 100% necessary to factor in ethical decisions into such huge financial moves. After this Goldman will never be seen the same.

Apr 17, 2010

Interesting analysis:

http://dealbook.blogs.nytimes.com/2010/04/16/goldm...

The case is by no means a slam dunk for the S.E.C., which will have to prove more than just negligence by Goldman or that 20-20 hindsight shows what the investors might have wanted to know about Paulson's bets against the mortgage market. For Goldman, the risk is being branded as having engaged in securities fraud and the consequence that the investors will use that finding for their own damages claims.

Apr 17, 2010

Just got a correction from the SEC. Turns out they only committed "froth".

Apr 17, 2010
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