Paulson & Co applied for dismissal of a lawsuit made by
ACA Financial Guaranty related to Abacus - a collateralized debt
obligation (CDO). The plaintiffs accused the company of joining
The Goldman Sachs Group, Inc.
) to obtain guaranteed payments from bond insurers on risky
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In 2011, ACA Financial filed a $120 million lawsuit against
Goldman and later in January, added Paulson & Co along with
its hedge fund unit - Paulson Credit Opportunities Master II Ltd
as the accused. The modified lawsuit claimed that Goldman and
Paulson tricked ACA Financial into believing that Paulson was
investing in the CDO. However, Paulson had taken a short position
However, in a filing with a N.Y.-based court, Paulson declared
that it did not mislead ACA Financial regarding Abacus. The
company assured that it had nothing to do with how Goldman
compensated its risk or how Abacus was sold to investors.
Further, Paulson maintained that Abacus, being a synthetic CDO,
ought to have a long and a short position and it made a credit
default swap agreement with Goldman to take a short position on
Moreover, Paulson maintained that ACA Financial's lawsuit was
mainly dependent on mischaracterizations, mails unassociated with
Abacus and scraps of communication, which were out of
The Abacus CDO has haunted Goldman and had entangled the banking
major in a legal mess right from the onset. Among the four
transactions involved in the lawsuit, the first one was the
Securities and Exchange Commission's (SEC) charges against the
company, accusing it of misleading investors by misrepresenting
facts in its mortgage-backed securities of over $1 billion. The
SEC's complaint accused the investment bank of creating a CDO
called Abacus 2007-AC1, which was made up of mortgage-backed
Goldman was also charged by the SEC in the U.S. for misstating
facts and selling bad quality subprime investments to its
customers in 2006, without disclosing the risk factors and the
vital role of Paulson & Co., a prime hedge fund, in the
portfolio selection process. Consequently, Goldman reached a
settlement of $550 million in Jul 2010 with the SEC.
The other three transactions included the Hudson CDO in 2006, the
Anderson CDO in 2007 and Timberwolf I hybrid CDO-squared
transaction in 2007. In all these transactions, Goldman was
blamed for making billions by selling poor quality assets to
clients while short-selling those securities.
Moreover, claims against individual defendants such as the chief
executive officer Lloyd Blankfein, the chief financial officer
David Viniar and chief operating officer Gary Cohn, were not
dismissed by the federal judge.
Later in Jul 2012, the federal judge in New York revoked the bid
filed by Goldman regarding the dismissal of a lawsuit charged
against the bank, accusing it of selling risky debts via
misleading statements. The U.S. District Judge, Paul Crotty, has
ordered the plaintiffs to pursue the proceedings over their
claims against Goldman relating to the offering of collateralized
debt obligations (CDOs).
The continuously increasing number of run-ins with financial
authorities could shatter Goldman's reputation and its
financials. Further, such issues are likely to add to the legal
expenses of the company. However, investors, who have lost their
hard-earned money in such investments, should feel relieved.
Among other banks,
JPMorgan Chase & Co.
M&T Bank Corp.
) have also been legally accused for distorting documents related
to mortgage-backed securities and other losses in 2011.
Goldman currently carries a Zacks Rank #3 (Hold).