CDO Complaints Stack Up for Goldman Sachs

In a recent filing with the Securities and Exchange Commission (SEC), the embattled securities firm acknowledged that it is currently dealing with several lawsuits by shareholders – including at least one pension fund – alleging wrongdoing related to collateralized-debt obligations handled by the firm.   

Included in the filing was a “demand” letter from the Louisiana Municipal Police Employees Retirement System (MPERS), refreshing an earlier call by the fund for Goldman Sachs’ board of directors to “take action to remedy the additional breaches of fiduciary duties and other misconduct by certain other officers and directors of the Company that have become public since the date of our original demand letter.”  MPERS had initially communicated with the firm on September 9, 2009, according to the filing.

“It has been over six months since this firm heard from the Board’s outside counsel in response to our demand letter. In that response, from Michael Braff, Esq., on September 11, 2009, counsel informed us that the letter had been reflated to the Board and that the Board would give it “appropriate consideration in due course.” We have heard nothing from either you, the Board, or counsel since then,” the MPERS letter states.

“Far from acting to investigate and correct the harm from misconduct arising from misrepresentations to customers in the ARS market, it appears that Goldman Sachs executives have determined to “double down” on the misconduct by acting to deceive Company customers in other markets as well,” MPERS notes.

Goldman was accused of fraud by the SEC in a lawsuit filed April 16 that claimed that the firm duped investors by failing to disclose details about a CDO it created with the help of hedge-fund firm Paulson & Co. – which made a profit of about $1 billion when the investment collapsed in value.   

The MPERS letter explains that “Unbeknownst to the investors, the securities in question, including a synthetic collateralized debt obligation (“CDO”) known as ABACUS 2007-AC1, were created by the Company at the behest of a sophisticated hedge fund customer which specifically wanted to take a short position in the very securities. Thus, Goldman Sachs was caused to market to one set of customers, as an attractive investment opportunity, securities which another customer—a large, sophisticated, and influential hedge fund—had specifically paid the Company to create and market, and which was betting billions of dollars would depreciate in value. Most importantly, the involvement of this hedge fund in structuring this CDO and its hand selection of the underlying collateral was never disclosed to investors. Rather, according to reports, later investors were told, in a materially misleading fashion, that the underlying collateral was entirely selected by an independent, third-party manager.”

The lawsuits were filed since April 22 in federal and state courts in New York, Goldman Sachs said in the SEC filing, noting that the firm, its board of directors and “certain officers and employees” are accused in the suits of “breach of fiduciary duty, corporate waste, abuse of control, mismanagement and unjust enrichment.”

Goldman Sachs has also been sued by pension funds in Pennsylvania, Illinois, and Michigan over bonuses paid to executives.     

The MPERS demand letter is available online at http://www.sec.gov/Archives/edgar/data/886982/000095012310042391/y84170exv99w7.htm