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SEC charges Goldman Sachs with fraud - lets see how tiny the fine ends up being...
04-16-2010, 07:37 PM,
#1
SEC charges Goldman Sachs with fraud - lets see how tiny the fine ends up being...
SEC charges Goldman Sachs with fraud!
By RICK UNGAR

The product was new and complex, but the deception and conflicts are old and simple,” Robert Khuzami, the director of the S.E.C.’s division of enforcement, said in a statement. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”
Via New York Times

Busted.

The charges revolve around a package of mortgage securities called Abacus 2007-AC1. Here’s how it worked-

At the request of a hedge fund operator named John Paulson, a guy who earned $2.7 billon in 2007 betting that the housing bubble was going to pop, leaving many mortgages in distress, Goldman created the fund allowing Paulson to choose the mortgage bonds he wanted included. They were all bonds that Paulsen believed were the most likely to lose value and, therefore, the ones Paulson most wanted to bet against.

Goldman then – allegedly – went out and sold the Abacus deal to overseas banks, hedge funds and other large players, knowing that the package had been purposefully constructed to lose its value. They allegedly lied about who had chosen the mortgage bonds included as their victims would have known what was going on had they been told that Paulson was picking them.

A big win for Mr. Paulson – a big loser for all the customers Goldman fleeced by enticing them to buy into the deal, expecting to make money when the value of the bonds went up.

Goldman’s defense –

We certainly did not know the future of the residential housing market in the first half of 2007 anymore than we can predict the future of markets today. We also did not know whether the value of the instruments we sold would increase or decrease.”
Via New York Times

Maybe. But they sure did know the bonds included were being hand selected by a short seller with a lot to gain by betting against the bonds.

Since the announcement, Goldman’s share price has tumbled 10%.
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04-16-2010, 07:39 PM,
#2
RE: SEC charges Goldman Sachs with fraud - lets see how tiny the fine ends up being...
what i want to know is where does the fine money go ?

in to some pool ? who gets it ?
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04-16-2010, 09:24 PM,
#3
RE: SEC charges Goldman Sachs with fraud - lets see how tiny the fine ends up being...
that's a really good question that I should have thought about, but didn't. thanks for asking. I'm assuming it goes to the SEC, since they're the ones suing, but that doesn't really make sense, does it? I'm guessing the SEC would then funnel the pittance that will hardly make a dent in GS to the "overseas banks, hedge funds and other large players" that they sold the securities to... poor bankers and hedge fund operators - they just have such a rough life.
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04-18-2010, 01:21 AM, (This post was last modified: 04-18-2010, 01:28 AM by h3rm35.)
#4
RE: SEC charges Goldman Sachs with fraud - lets see how tiny the fine ends up being...
Personally, I'm waiting on Taibbi's take on the situation... On friday, he wasn't ready to really say much because he had developing info...

Quote:Goldman case likely to unleash torrent of lawsuits
By DANIEL WAGNER, AP Business Writer Daniel Wagner, Ap Business Writer 1 hr 54 mins ago

WASHINGTON – The fraud charges against Goldman Sachs & Co. that rocked financial markets Friday are no slam dunk, as hazy evidence and strategic pitfalls could easily trip up government lawyers.

Yet that hardly matters, experts say, because the allegations will kick off a new era of litigation that could entangle Goldman and other banks for years to come.

The charges against Goldman relate to a complex investment tied to the performance of pools of risky mortgages. In a complaint filed Friday, the Securities and Exchange Commission alleged that Goldman marketed the package to investors without disclosing a major conflict of interest: The pools were picked by another client, a prominent hedge fund that was betting the housing bubble would burst.

Goldman said the charges are "unfounded in law and fact." In a written response to the charges, the bank said it had provided "extensive disclosure" to investors and that the largest investor had selected the portfolio — not the hedge fund client. Goldman said it lost $90 million on the deal.

That doesn't contradict the SEC complaint, which says the largest investor selected the mortgage investments from a list provided by the hedge fund. And the fact that Goldman lost money has no impact on the fraud charges.

The charges will unleash a torrent of lawsuits, and likely signal that the government is prepared to file more lawsuits related to the overheated market that preceded the financial crisis, experts said.

"This is just the tip of the iceberg," said James Hackney, a professor at Northeastern University School of Law. "There are a lot of folks out there in different deals who played similar roles, and once it starts building steam, plaintiffs' lawyers will figure out this is where the money is and there should be a lot of action."

Among the legal action expected in the coming months:

• Class-action suits by Goldman shareholders who believe Goldman alleged misconduct made their stakes less valuable could come as early as Monday. Such suits are common when companies are accused of wrongdoing. Goldman shares fell almost 13 percent Friday as the bank lost $12.5 billion in market capitalization.

• Suits by investors who believe Goldman sold them on deals that were doomed to fail. The investors in the transaction at the heart of the SEC case could sue first, followed by others who believe their losses were similar.

• Possible criminal charges, if the SEC's civil case reveals evidence that meets the higher standard of "proof beyond a reasonable doubt." Experts said it's unlikely the company as a whole will face criminal charges, but evidence could emerge that would expose the Goldman executive named in the SEC complaint, 31-year-old Fabrice Tourre, to criminal prosecution.

• Charges by regulators about other mortgage investments at Goldman and elsewhere. SEC enforcement chief Robert Khuzami told reporters Friday the agency is racking up evidence on other deals in the overheated market that preceded the financial crisis.

Already the case has provoked legal questions from foreign governments, according to published reports. That's because the financial crisis forced many countries to bail out banks that lost money on investments arranged by Goldman.

German regulators are considering legal action against Goldman, newspaper Welt am Sonntag reported, quoting a spokesman for Chancellor Angela Merkel.

The charges would be on behalf of IKB Deutsche Industriebank AG — an early victim of the financial crisis that was rescued by the state-owned KfW development bank among others. IKB invested in the deal regulators are targeting.

The flurry of legal activity is likely to proceed separately from the SEC's case against Goldman, which experts said faces numerous pitfalls.

To prove its fraud case against Goldman, the government must show that Goldman misled investors or failed to tell them facts that would have affected their financial decisions.

The government's greatest challenge, experts said, will be boiling the case down to a simple matter of fraud. The issues involved are so complex that Goldman may be able to introduce enough complicating factors to shed some doubt on the government's claims.

"If you wanted to go after Goldman with a complaint that wouldn't stick, this would be perfect," said Janet Tavakoli, president of Tavakoli Structured Finance, a Chicago consulting firm. "If you look at these products, almost all of them look like hoaxes because of the junk inside."

Legal experts pointed to the paucity of evidence in the government's lawsuit, which contains short excerpts from e-mails but lacks key information about what the various investors knew and what actions they took.

The quality of the evidence was not clear from the complaint, said Jacob Frenkel, a former SEC enforcement lawyer now with Shulman, Rogers, Gandal, Pordy & Ecker PA.

Frenkel said there's been an uptick in "cases where the government chooses select excerpts from e-mails as the basis for its allegations only to find the balance of the text or other e-mails prove otherwise."

For example, prosecutors last fall tried unsuccessfully to use a series of e-mails to convict two Bear Stearns hedge fund executives. They wanted to convince jurors that there was behind-the-scenes alarm at the hedge funds as investments in complex securities tied to mortgages began to slide.

The jurors were not swayed. After the verdict, some jurors told reporters they found the evidence against the two executives flimsy and contradictory. Others suggested the pair were being blamed for market forces beyond their control.

Goldman already has advanced a similar argument. "Any investor losses result from the overall negative performance of the entire sector, not because of which particular securities" were in the investment pool, the bank said in a written response to the charges Friday.

That's part of a time-honored tradition of defusing accusations by bringing in details that may or may not be relevant, said James Cohen, a professor at Fordham University School of Law.

"Traditionally it's in the interest of the party that has Goldman's role to muddy the waters — it's rarely in their interest to have the picture as sharp as HDTV," Cohen said.

Several legal experts suggested Goldman and the SEC had reached an impasse over a settlement before the charges were announced. They speculated that Goldman was unwilling to admit that it allowed the hedge fund to create a portfolio of securities that was designed to fail because that admission could do irreparable harm to Goldman's reputation.

"Goldman could've easily paid a fine already," said John Coffee, a securities law professor at Columbia University. "So I don't think it's money they're fighting over."

The case has been assigned to U.S. District Judge Barbara Jones of New York. Jones is the federal judge who five years ago presided over the $11 billion criminal fraud case that toppled WorldCom Corp. and sent its former CEO Bernard Ebbers to prison for 25 years.

___

AP Business Writer Stevenson Jacobs in New York and AP Real Estate Writer Alan Zibel in Washington contributed to this report.
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08-21-2011, 09:22 AM,
#5
RE: SEC charges Goldman Sachs with fraud - lets see how tiny the fine ends up being...
So where did the money go?

Quote:SEC Settlement with Goldman Sachs for $550 Million Approved by U.S. Judge
..
The payment includes a $300 million fine and $250 million as restitution to investors. IKB Deutsche Industriebank AG, the first German lender bailed out during the subprime crisis, will receive $150 million, and Royal Bank of Scotland Plc will get $100 million, according to the settlement agreement.
http://www.bloomberg.com/news/2010-07-20/goldman-sachs-settlement-with-sec-for-550-million-approved-by-u-s-judge.html

The $300 Million fine well that goes to the US Treasury. Which spends it all sorts of stuff like debt financing and bailouts.

US Treasury Spending Reports
http://www.fms.treas.gov/fr/index.html

The "winners":

IKB Deutsche Industriebank AG
http://www.ikb.de/

The bank has tanked as of late. Probably a conduit for inflating bubbles and/or being a shell for transferring funds to other institutions. It makes a lot of loans to big business and is heavy into real estate.

Quote:IKB Deutsche Industriebank AG is a Germany-based banking company, which specializes in the field of long-term financing. It offers a range of financial products and services directed at medium-sized domestic as well as multinational companies and project partners. The Company’s focuses on two segments: Corporate Customers, including domestic corporate financing, especially lending, but also product leasing and private equity; and Real Estate Customers, which provides customized financing solutions as well as related services for industrial real estate. As of 31 March, 2010, it operated through direct and indirect subsidiaries located in Germany, the United States, the Netherlands, Luxembourg, Austria, the Czech Republic, France, Hungary, Poland, Russia, Slovakia and Romania.

Royal Bank of Scotland Plc
http://www.rbs.co.uk/

Quote:The Royal Bank of Scotland Group plc (RBS) is a holding company of a global banking and financial services group. The Company operates in the United Kingdom, the United States and internationally through its two principal subsidiaries: The Royal Bank of Scotland plc (the Royal Bank) and National Westminster Bank Plc (NatWest). Both the Royal Bank and NatWest are clearing banks. In the United States, the Company’s subsidiary Citizens Financial Group, Inc. (Citizens) is a commercial banking organization. The Company’s business segment include UK Retail, UK Corporate, Wealth, Global Transaction Services, Ulster Bank, US Retail & Commercial, Global Banking & Markets (GBM), RBS Insurance, Central Functions, Non-Core Division and Business Services. IN December 2010, the Company sold Sempra North American Power and Gas to J.P.Morgan.
http://www.reuters.com/finance/stocks/companyProfile?symbol=IKBG.DE

RBS has liquidated much of its assets in an agreement for an EU bailout. It is appears to be a dump bank for absorbing bad real estate debt now by looking at its recent transactions.

RBS is also a corporate lender and personal bank. Their stock has also tanked. It is not related to the Royal Bank of Canada (RBC).

But this is where it gets a bit interesting..

Quote:the UK Government (HM Treasury) holds an 84% controlling share (economic interest; actual voting rights will not rise above 75% in order to retain stock listing).[2] This stake is held and managed through UK Financial Investments Limited. The group is based in Edinburgh, Scotland, and is the world's largest company by assets.[3]

The group controls the Royal Bank of Scotland plc,[4] founded in 1727 by a Royal Charter of King George I, the National Westminster Bank, which can trace its lineage back to 1650, and Ulster Bank in Ireland.[5]

RBS Group is the largest banking group in Scotland, and at its earlier peak was the second largest in the UK and Europe (fifth in stock market value), and the fifth largest in the world by market capitalisation. According to Forbes Global 2000, it was the tenth largest company in the world.[6] Its shares have a primary listing on the London Stock Exchange. The registered head office of the group and the UK clearing bank are located at St Andrew Square, Edinburgh. In 2005, Queen Elizabeth II opened the bank's new head office building in Gogarburn, Edinburgh.

The RBS Group operates a wide variety of banking brands offering personal and business banking, private banking, insurance and corporate finance throughout its operations located in Europe, North America and Asia. In the UK and Republic of Ireland, the main subsidiary companies are: The Royal Bank of Scotland; National Westminster Bank; Ulster Bank; Drummonds; and Coutts & Co. In the United States, it owns Citizens Financial Group, the 8th largest bank in the country. From 2004 to 2009 it was the second largest shareholder in the Bank of China, itself the world's fifth largest bank by market capitalisation in February 2008.[7] Insurance companies include Churchill Insurance, Direct Line, Privilege, and NIG.
~wiki

Back to Goldman and the SEC.

Quote:..The SEC is painting the case as a victory for the government, touting the fine and the fact that Goldman admitted to omitting important information from the marketing materials for the Abacus subprime mortgage derivative products it sold in 2007.

But that settlement is far smaller than the $1 billion many expected.

More importantly, Goldman avoided the fraud allegations it feared the most. The one misdeed it to which it confessed—omitting the role of hedge fund manager John Paulson in selecting the securities that went into the synthetic collateralized debt obligation at the heart of the case—is the least damaging in terms of Goldman’s reputation and future legal liability.
..
subsection 17(a)(2) does not employ any form of the word “fraud” or “deceit.” It makes the sale of a security or a derivative unlawful if a material omission renders the sale merely “misleading.” That seems to be what Goldman has admitted to doing in the settlement.

All references to violations of Section 10(b) of the Exchange Act were dropped.
..
http://www.cnbc.com/id/38268903/Settlement_Is_Win_for_Goldman_Despite_Record_Fine

Section 10(b) of the Exchange Act
http://taft.law.uc.edu/CCL/34Act/sec10.html

So where did it all go? We can't follow it all but we know it went to the US Treasury funnel, A German Bank and a UK bank owned by the largest bank in the world (by asset value) that is under Royal British ownership (official owner is listed as Her Majesty's Government and it was founded by Royalty) that finances the operations of the biggest multi-nationals in the world and kickstarted the Bank of China during its biggest growth period by taking a 10% ownership stake. A little digging revealed GE, Tesco, Tracker, BMW, Kraft and JP Morgan all have connections as well, I'm sure many more.

Relatively this is not really a huge amount compared to bailout and legal help from the UK government. £37bn in bailouts were given to RBS to remain solvent in a single transaction.
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