US Accuses Goldman Sachs of Fraud by Louise Story and Gretchen Morgenson April 16, 2010 by The New York Times
Goldman Sachs, which emerged relatively unscathed from the financial crisis, was accused of securities fraud in a civil suit filed Friday by the Securities and Exchange Commission, which claims the bank created and sold a mortgage investment that was secretly devised to fail. The move marks the first time that regulators have taken action against a Wall Street deal that helped investors capitalize on the collapse of the housing market. Goldman itself profited by betting against the very mortgage investments that it sold to its customers.
The suit also named Fabrice Tourre, a vice president at Goldman who helped create and sell the investment.
The instrument in the S.E.C. case, called Abacus 2007-AC1, was one of 25 deals that Goldman created so the bank and select clients could bet against the housing market. Those deals, which were the subject of an article in The New York Times in December, initially protected Goldman from losses when the mortgage market disintegrated and later yielded profits for the bank.
As the Abacus deals plunged in value, Goldman and certain hedge funds made money on their negative bets, while the Goldman clients who bought the $10.9 billion in investments lost billions of dollars. December, initially protected Goldman from losses when the mortgage market disintegrated and later yielded profits for the bank.
According to the complaint, Goldman created Abacus 2007-AC1 in February 2007, at the request of John A. Paulson, a prominent hedge fund manager who earned an estimated $3.7 billion in 2007 by correctly wagering that the housing bubble would burst.
The Abacus deals deteriorated rapidly when the housing market hit trouble. For instance, in the Abacus deal in the S.E.C. complaint, 84 percent of the mortgages underlying it were downgraded by rating agencies just five months later, according to a UBS report.
It takes time for such mortgage investments to pay out for investors who short them, like Mr. Paulson. Each deal is structured differently, but generally, the bonds underlying the investment must deteriorate to a certain point before short-sellers get paid. By the end of 2007, Mr. Paulson’s credit hedge fund was up 590 percent.
Mr. Paulson’s firm, Paulson & Company, is paid a management fee and 20 percent of the annual profits that its funds generate, according to a Paulson investor document from late 2008 titled “Navigating Through the Crisis.” READ MORE: http://www.commondreams.org/headline/2010/04/16-5
Goldman Case Is Likely Tip of the Legal Iceberg by Daniel Wagner April 18, 2010 by The Associated Press
Shareholder suits, criminal indictments likely after fraud allegations
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.
“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,” said James Cohen, a professor at Fordham University School of Law.
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. READ MORE: http://www.commondreams.org/headline/2010/04/18-5
Crocodile Tears on Wall Street by Bill Moyers and Michael Winship April 17, 2010 by CommonDreams.org
With all due respect, we can only wish those Tea Party activists who gathered in Washington and other cities this week weren’t so single-minded about just who’s responsible for all their troubles, real and imagined. They’re up in arms, so to speak, against Big Government, especially the Obama administration.
If they thought this through, they’d be joining forces with other grassroots Americans who in the coming weeks will be demonstrating in Washington and other cities against High Finance, taking on Wall Street and the country’s biggest banks.
The original Tea Party, remember, wasn’t directed just against the British redcoats. Colonial patriots also took aim at the East India Company. That was the joint-stock enterprise originally chartered by the first Queen Elizabeth. Over the years, the government granted them special rights and privileges, which the owners turned into a monopoly over trade, including tea.
It may seem a bit of a stretch from tea to credit default swaps, but the principle is the same:when enormous private wealth goes unchecked, regular folks get hurt — badly. That’s what happened in 2008 when the monied interests led us up the garden path to the great collapse.
The GOP’s SWAT team — also known as the United States Chamber of Commerce — has already spent three million dollars to try to kill or cripple a key part of reform — the proposed new Consumer Financial Protection Agency. With the Chamber as their front, corporations have bankrolled ads that make it seem like the Red Army is at our doorsteps.
Advocates for reform have countered with ads of their own, but Democrats are deeply in hock to Wall Street, too. Remember the hedge fund Magnetar that bet against its own products? The owners covered their bets with ample campaign contributions to Rahm Emanuel. Yep, the same — President Obama’s White House chief of staff. At the time he was an Illinois congressman and chair of the Democratic Congressional Campaign Committee, which collected millions of dollars from the financial services industry.
In fact, the website Politico.com reports that “the nation’s ten richest hedge fund managers have dumped nearly one million dollars into campaign accounts over the past several years… consumer advocates and critics from other financial sectors say hedge funds would get off pretty easily” under the Senate reform bill.
Bottom line: “The Wall Street banks are the new American oligarchy – a group that gains political power because of its economic power, and then uses that political power for its own benefit.” So write Simon Johnson, former chief economist at the International Monetary Fund; and James Kwak, former management consultant and software entrepreneur, in their important new book, “13 Bankers: The Wall Street Takeover and the Next Financial Meltdown.”
Their words of warning and the past year and a half make you realize that as usual, Thomas Jefferson, whose birthday we celebrate this week, had it right. Back in 1816, he wrote, “I sincerely believe… that banking establishments are more dangerous than standing armies.”
Bill Moyers is managing editor and Michael Winship is senior writer of the weekly public affairs program Bill Moyers Journal, which airs Friday night on PBS. Check local airtimes or comment at The Moyers Blog at www.pbs.org/moyers . READ MORE: http://www.commondreams.org/view/2010/04/17
West Virginia Open to Homicide Prosecution for Massey Coal Mine Deaths by Corporate Crime Reporter April 16, 2010 by Corporate Crime Reporter
For years, the state of West Virginia was proud to say that it was “open for business.”
In a twist, now it might be open for a homicide prosecution in connection with the deaths of 29 miners at the Massey Energy mine in Raleigh County, West Virginia earlier this month.
“If there is evidence to support a homicide prosecution, I would not hesitate to prosecute,” Kristen Keller, the prosecuting attorney for Raleigh County told Corporate Crime Reporter last week.
Keller says she has been in touch with the West Virginia State Police on the matter.
And she says that any federal regulatory investigation would not preclude a state homicide investigation.
“A federal regulatory investigation does not satisfy the need for a state criminal investigation,” Keller said. “If there were a car accident where one or ten or 29 people were killed – a federal investigation would not preclude a state criminal investigation. In fact, there would be a state criminal investigation.”
Twenty-nine miners died at Massey’s Upper Big Branch mine in Raleigh County as the result of an explosion on April 5.
Since then, there have been calls for both federal and state criminal prosecution. READ MORE: http://www.commondreams.org/headline/2010/04/16-8
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