Politics

Goldman goes on offense against SEC complaint

Jon Ward Contributor
Font Size:

Goldman Sachs took aim Tuesday at the heart of the government’s complaint against the firm, charging that the investors it stands accused of deceiving were paid a fee to determine the final makeup of the financial instrument at issue in the case.

In a conference call to announce first quarter earnings, which nearly doubled from a year ago, two Goldman officials said ACA Management LLC was fully in control of which mortgage-backed securities were included and which were not in a package of such holdings.

ACA “evaluated every proposed security” and “had sole responsibility for determining, and did determine, the final portfolio and was paid a fee for that role,” said Greg Palm, Goldman’s co-general counsel.

ACA was the primary investor that bet long on the instrument, known as a collaterized debt obligation (CDO), and lost more than $1 billion when the housing market collapsed.

Goldman Chief Financial Officer David Viniar said the bank lost more than $100 million in the deal, higher than the more than $90 million initially stated last week.

The suit by the Securities and Exchange Commission, however, alleges that Paulson & Co. Inc., who profited by about $1 billion on the deal by betting against the CDO, did have a role in the selection of which mortgage-backed securities were included.

“Paulson heavily influenced the selection of the portfolio to suit its economic interests,” the complaint states, and accuses Goldman of omitting Paulson’s role in proposing the securities in its “marketing materials used to promote the transaction.”

The complaint also charges that Goldman Vice President Fabrice Tourre “misled ACA into believing that Paulson invested approximately $200 million in the equity of ABACUS 2007-ACI (a long position) and, accordingly, that Paulson’s interests in the collateral section process were aligned with ACA’s when in reality Paulson’s interests were sharply conflicting.”

In Tuesday’s conference call, Goldman counsel Palm was absolute.

“The portfolio here was not selected by John Paulson. The portfolio here was selected by ACA,” Palm said.

And Viniar used Goldman’s first quarter earnings of $3.46 billion to argue that the firm remains credible.

“You can see from our results last quarter that our clients still support us,” he said.

E-mail Jon Ward and follow him on Twitter