New York Post Is Reporting That Goldman Sachs is Considering Settlement of Fraud Case

According to an article posted on the New York Post web site earlier today, "sources familiar with the matter" indicate that Goldman Sachs may "soon" settle its fraud case with the SEC.

On April 16th, 2010, the Securities and Exchange Commission charged Goldman, Sachs & Co. and Fabrice Tourre (a Goldman Sachs employee) with fraud. The SEC alleges that Goldman Sachs and Tourre misled investors in the ABACUS 2007-AC1 CDO about two things:

1. The role that Paulson and Co. Inc. played in selecting the reference portfolio of RMBS (Residential Mortgage-Backed Securities) that would be underlying the CDO

2. Whether or not Paulson and Co. Inc. would be making a sizable investment in the equity of the CDO

The SEC alleges that John Paulson cherry-picked the RMBS that would be most likely to experience a "credit event" so that his credit default swaps would spike in value. Paulson and Co. Inc. was actually betting AGAINST the CDO through the use of credit default swaps, which is why, according to the SEC, he picked the securities most likely to default. The SEC's issues were their contention that Goldman Sachs claimed that ACA Management LLC had been solely responsible for selecting the portfolio of RMBS, and that John Paulson's name was nowhere to be found in the marketing materials for the CDO.

The SEC also alleges that investors in the CDO were led to believe that Paulson and Co. Inc. would be investing approximately $200 million in the equity of ABACUS 2007-AC1, when this was actually not the case. In fact, Paulson's interests were in seeing the CDO do as poorly as possible.

Goldman Sachs was completely caught off-guard by the civil lawsuit and immediately proclaimed their innocence, claiming that they had done absolutely nothing wrong.

Many people were skeptical of the reasons behind the lawsuit, with some believing that the real reason behind the complaint was to swing votes for the upcoming financial regulation bill.

Goldman Sachs has been absolutely killed in the court of public opinion in the two weeks since the lawsuit was first announced, which is why the talk of a settlement makes a great deal of sense. Most people were already of the opinion that the SEC and Goldman Sachs would eventually settle anyways.

The spotlight continued to shine on Goldman Sachs earlier this week when CEO Lloyd Blankfein was grilled in a Senate hearing. Blankfein's appearance gave the media more quotables and sound bytes that would be used to continue to embarrass the storied firm.

The bottom line is that Goldman Sachs does not want this situation to stretch on without a resolution. They have likely realized that they will never be able to sway public opinion in their favor, and that defending themselves against the SEC lawsuit will likely result in more embarrassment for the company. I'm sure that they would rather agree on a settlement, take the hit and hope that the mainstream media moves on to another story.

The big questions, of course, are:

1. How much would a settlement with the SEC cost Goldman Sachs?

2. What kind of damage would a settlement do to the firm?

3. How many other lawsuits would Goldman Sachs be exposed to if they chose to settle with the SEC?

My personal opinion is that Goldman Sachs will definitely settle with the SEC, as there is no way that they would want this to go to trial and then to a jury. The amount of damage inflicted by the end of that trial to Goldman Sachs would be immense, IMO.

Source: New York Post - After Drubbing, Goldman Mulling Deal with SEC

Filed under: General Market News