Goldman Sachs sued over mortgage deal cited by SEC

McClatchy NewspapersJanuary 6, 2011 

WASHINGTON — A foundering bond insurer filed a civil fraud suit against Goldman Sachs Thursday over the same exotic mortgage securities deal in which Goldman paid $550 million last summer in a settlement with the Securities and Exchange Commission.

ACA Financial Guaranty Corp. charged that Goldman helped a major client, the hedge fund Paulson & Co., rig the billion-dollar deal by allowing the firm to pack it with securities backed by highly risky mortgages in early 2007 as the housing market was beginning to collapse.

ACA invested heavily in the deal, known as Abacus 2007-AC1, in the belief that Paulson had agreed to absorb the first losses, while Goldman concealed that the hedge fund was actually betting that the so-called synthetic securities would default, the suit said.

Goldman initially bet on the failure of the underlying bonds in the deal, but secretly sold its position to Paulson.

Paulson ultimately racked up $1 billion in profits on the deal while ACA and European banks lost that much. Besides investing $42 million, ACA wrote $909 million in insurance on the securities in the deal. When the insurer ran into financial problems, the European bank, ABN Amro, reinsured ACA's position at Goldman's insistence, the suit said.

When nearly all of the securities in the deal defaulted, ABN Amro, now owned by the Royal Bank of Scotland, paid Goldman $840 million. The German bank IKB also invested $50 million.

A Goldman spokesman had no immediate comment on ACA's suit, filed in the New York Supreme Court, which governs many of the $1.3 trillion in offshore deals marketed from 2001 to 2008.

In settling the SEC fraud suit last summer, Goldman said that it regretted providing "incomplete information" to investors in the transaction, but didn't admit to wrongdoing.

Before approaching Goldman, Paulson tried to persuade the now-defunct investment bank Bear Stearns help it put such a deal together, according to "The Greatest Trade Ever," a book on the transaction authored by the Wall Street Journal's Gregory Zuckerman.

However, Zuckerman wrote, Bear Stearns turned him down. Scott Eichel, a senior Bear Stearns trader who attended the meeting, felt it was improper, Zuckerman wrote, likening it to "a bettor asking a football owner to bench a star quarterback to improve the odds of his wager against the team."

ACA's suit seeks $30 million in compensatory damages and $90 million in punitive damages.

Under last year's settlement with the SEC, $250 million was set aside for investors in the deal. Neither IKB nor the Royal Bank of Scotland has sued.

While Goldman and the SEC settled, the agency is still pursuing a civil fraud suit against Fabrice Tourre, the young vice president in a Goldman structured securities unit who put the deal together. Tourre now works in Goldman's London office.

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