SEC v. Goldman Sachs ABACUS
 Logo of Goldman Sachs | |
| Company type | Public company |
|---|---|
| Industry | Financial services, Investment banking |
| Founded | 1869 |
| Headquarters | New York City , United States |
| Products | Wealth management, Proprietary trading, Investment banking |
SEC v. Goldman Sachs & Co, civ 3229 (S.D. of NY 2010) was a civil lawsuit brought before the United States District Court for the Southern District of New York by the U.S. Securities and Exchange Commission against Goldman Sachs (GS&Co) and employee Fabrice Tourre regarding the ABACUS 2007-AC1 synthetic collateralized debt obligation (CDO). The court ruled in favor of the SEC, imposing a then-unprecedented $550 million penalty on the defendants.
The SEC charged GS&Co and Tourre with failing to disclose and misrepresenting key details about ABACUS 2007-AC1, which was tied to subprime mortgage-backed securities. This synthetic CDO was among the financial instruments that exacerbated the 2008 financial crisis. Goldman Sachs acknowledged that their promotional materials contained "incomplete information."
History
On April 16, 2010, the SEC initiated legal action in the Southern District of New York against GS&Co and Fabrice Tourre for falsely representing ACA Management LLC's ("ACA") involvement in selecting the ABACUS CDO’s reference portfolio.
Background on involved parties
- Goldman Sachs: Established in 1869 and based in New York City, Goldman Sachs stands as a premier global financial institution and ranks as the world’s second-largest investment bank. The firm focuses on wealth management and proprietary trading, guided by principles of partnership, client service, integrity, and excellence.
- U.S. Securities and Exchange Commission: The SEC oversees securities markets, brokers, dealers, investment advisors, and mutual funds to promote transparency and prevent fraudulent activities.
- Paulson & Co.: Founded in 1994 in New York, this investment firm specializes in small to mid-cap market investments. Under John Alfred Paulson’s leadership until 2020, it shifted its focus towards managing family assets.
- ACA Management LLC: As the asset management arm of bond insurer ACA Capital Holdings, ACA managed 22 CDOs with assets totaling $16 billion at that time. ACA Financial Guaranty, a subsidiary, provided credit protection on the ABACUS transaction. The SEC characterized ACA as a party exploited by Goldman Sachs.
- IKB Deutsche Industriebank (IKB): Based in Dusseldorf with a history spanning over 90 years, IKB concentrates on lending to small and medium-sized enterprises. It incurred losses from the ABACUS transaction and received a bailout in 2007; the SEC found it liable in this matter.
The event
The marketing documents for the CDO prepared by GS&Co—including the term sheet and offering memorandum—asserted that ACA had selected the reference portfolio. In reality, Paulson & Co. Inc. ("Paulson"), a major hedge fund holding positions opposite those of ABACUS 2007-AC1 investors, controlled portfolio selection. Paulson bet against the RMBS portfolio it assembled by entering into credit default swaps ("CDS") with GS&Co., profiting if the portfolio declined in value. GS&Co failed to disclose Paulson’s actual role or conflicting interests within their marketing materials.
Fabrice Tourre, a GS&Co employee based in New York City and identified by the SEC as ABACUS’s principal architect, managed communications with investors and prepared misleading marketing content. He was likely aware of Paulson’s short position and allegedly misled ACA by suggesting Paulson held a long position aligned with ACA’s interests. The transaction closed on April 26, 2007; GS&Co received $15 million from Paulson for structuring and marketing the CDO. By October 24, 2007, 83% of the RMBS were downgraded with another 17% placed on negative watch; by January, downgrades reached 99%. Investors suffered losses exceeding $1 billion while Paulson gained $1 billion from its short position.
Verdict
Goldman Sachs and Tourre were determined to have breached securities regulations, specifically Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act. The SEC imposed a $550 million penalty on Goldman Sachs, marking the largest fine ever levied against the firm at that time. Of this amount, $250 million was allocated to compensate defrauded investors, while $300 million was directed to the U.S. Treasury. Goldman Sachs acknowledged that its promotional materials contained "incomplete information." The SEC viewed ACA as an uninformed participant in the transaction and chose not to levy any legal sanctions against them, despite ACA gaining from the collaboration.
Consequences
In the aftermath of the SEC's settlement with Goldman Sachs, the Dow Jones Industrial Average rebounded from an initial decline of 100 points to close only 7 points lower. Shares of Goldman Sachs increased by roughly $6, finishing at $145.22, notwithstanding the introduction of new regulations that signaled substantial shifts for Wall Street practices. Although the market recovered, apprehensions regarding Wall Street’s ethical standards prompted enhanced regulatory scrutiny.