Goldman Sachs ‘Had Duty’ to Keep ‘Relatively Unknown’ Billionaire John Paulson’s Bets Secret

The company (Goldman) failed to disclose that hedge fund Paulson & Co., run by billionaire John Paulson, helped pick the underlying securities in a collateralized debt obligation and then bet against them, …

‘Relatively Unkown’

Participants knew “someone had to take the other side of the portfolio risk,” and disclosing that “the relatively unknown Paulson” was betting against the CDO wouldn’t have been material to the investors, Goldman Sachs said in the September document. The facts show “no one in fact considered Paulson’s role important and that no one was misled.”

Paulson, who oversees about $32 billion in hedge funds, became more prominent after his firm generated about $3 billion of profit in 2007, fueled by bets against subprime mortgages. He was featured in the book “The Greatest Trade Ever: The Behind- the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History.”

Relatively unkown! ROFL!


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April 20 (Bloomberg) — Goldman Sachs Group Inc., being sued by the U.S. Securities and Exchange Commission over claims that it deceived investors about one of its financial products, tried to fend off regulators last fall by arguing it had a duty to keep the information confidential.

The company failed to disclose that hedge fund Paulson & Co., run by billionaire John Paulson, helped pick the underlying securities in a collateralized debt obligation and then bet against them, the SEC said in a lawsuit filed April 16. After being told in July 2009 that the SEC planned to bring a complaint, New York-based Goldman Sachs argued it had been compelled to keep Paulson’s role secret.

The SEC’s “proposed theory ignores the fact that, as a broker-dealer acting as an intermediary on behalf of a client, Goldman Sachs had a duty to keep information concerning its client’s (Paulson’s) trades, positions and trading strategy confidential,” the company said in a Sept. 10, 2009, document addressed to the agency.

Goldman Sachs, the most profitable company in Wall Street history, created and sold CDOs linked to subprime mortgages in 2007, using ACA Management LLC, a firm that analyzes credit risk, to select underlying securities. Goldman Sachs knew that at least one prospective investor, Dusseldorf, Germany-based IKB Deutsche Industriebank AG, wasn’t likely to invest in a CDO that didn’t have a collateral manager to analyze and select the portfolio, according to the SEC’s lawsuit. Goldman Sachs misled investors by not disclosing that Paulson had a hand in picking the portfolio, according to the SEC’s lawsuit.

ABN Amro

ABN Amro Bank NV had a loss of more than $840 million on the deal and IKB lost almost all of its $150 million investment, according to the SEC’s complaint. Goldman Sachs said it lost more than $90 million because it had an investment in the deal, overwhelming the $15 million in fees it earned by engineering the product. Paulson’s firm earned $1 billion on the trade and wasn’t accused of wrongdoing.

The Sept. 10 letter was one of at least two sent to the SEC in response to the agency’s Wells notice — a signal of its intention to pursue a lawsuit. The responses were prepared by Sullivan & Cromwell LLP, a New York-based law firm representing Goldman Sachs.

All participants in the transaction were “highly sophisticated institutions” that had the resources and expertise to perform due diligence, analyze the portfolio and form their own market views, the letter said. Goldman Sachs’s actions were “entirely appropriate” and it “will take all necessary steps to defend the firm” against the allegations, the company said in a statement.

‘Relatively Unkown’

Participants knew “someone had to take the other side of the portfolio risk,” and disclosing that “the relatively unknown Paulson” was betting against the CDO wouldn’t have been material to the investors, Goldman Sachs said in the September document. The facts show “no one in fact considered Paulson’s role important and that no one was misled.”

Paulson, who oversees about $32 billion in hedge funds, became more prominent after his firm generated about $3 billion of profit in 2007, fueled by bets against subprime mortgages. He was featured in the book “The Greatest Trade Ever: The Behind- the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History.”

Goldman Sachs has come under fire from overseas regulators after the SEC’s lawsuit. U.K. Prime Minister Gordon Brown has called for the Financial Services Authority to start a probe of the firm and Germany’s financial regulator, BaFin, asked the SEC for details on its lawsuit.

Brown said he was “shocked” at the “moral bankruptcy” indicated in the suit.

–With assistance from Christine Harper in New York. Editors: Lawrence Roberts, Gregory Mott

By Joshua Gallu
April 20, 2010, 10:28 AM EDT

Source: Bloomberg

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