Insurer claims it was misled by Goldman Sachs on mortgage-backed investment
Thursday, January 6, 2011; 8:31 PM
Abacus is the albatross that Goldman Sachs can't shed.
First, the Securities and Exchange Commission charged Goldman with civil fraud for creating and marketing Abacus, a complex mortgage investment that the agency said the Wall Street bank had secretly designed to fail.
Next, lawmakers published a bruising report centered on Abacus that accused Goldman of acting against the interests of its clients and held a hearing to castigate the firm's executives.
And on Thursday, one of Goldman's clients announced it had sued the bank seeking $120 million in damages, alleging it had been misled and defrauded in connection with Abacus. Goldman declined to comment.
The suit was filed by ACA Financial Guaranty, a New York company that sells insurance on certain types of investments. Investors buy coverage from ACA to cover losses in case their investments decline significantly in value.
ACA both invested in Abacus and sold insurance on the security.
The company's suit against Goldman goes further than the lawsuit that the SEC filed against the bank in April. The SEC declined to comment Thursday.
The SEC had alleged that Goldman misled Abacus investors by failing to tell them important information about how it was designed. ACA's lawsuit says Goldman did something even more egregious, claiming that Goldman not only failed to give its executives important information about Abacus but also provided false information about the investment.
ACA "is entitled to compensation from Goldman for Goldman's deception in connection with the Abacus transaction," said Marc E. Kasowitz, a lawyer representing ACA.
Abacus was a collection of bonds backed by home loans extended to people with thin or weak credit. The investment was carved up into parts and sold to different domestic and foreign clients.
What buyers of these securities didn't know, the SEC alleged, was that Goldman had allowed a hedge fund manager named John Paulson to pick many of the home loans that would go into the Abacus security.
This was notable, the SEC said, because Paulson was carrying out a strategy of betting against the mortgage market - and therefore picked home loans he thought would be more likely to default.
In the meantime, Goldman helped Paulson bet against Abacus.
In July, Goldman agreed to pay $550 million to settle the SEC's lawsuit and made a rare acknowledgement that it had made a "mistake" in marketing investment materials that had "incomplete information."
ACA's complaint goes further, accusing Goldman of lying to the company. In January 2007, an ACA executive asked Goldman about what role Paulson planned to play in the Abacus transaction, according to e-mails cited in the ACA complaint.
In response, Goldman told ACA that Paulson planned to invest in Abacus, according to the complaint.
"Had Paulson's true role as a short investor selecting the portfolio been known, neither ACA nor anyone else would have taken a long position in it," ACA said.