Could Goldman Sachs Charges Result in Arbitration Filings?

Washington, DCThe Securities and Exchange Commission (SEC) announced that it has filed charges against financial firm Goldman Sachs, alleging that the firm defrauded investors by making misleading statements about some of its investment products. In certain situations, when investors lose money, they must file a stockbroker arbitration in an attempt to recover their lost investments. In this situation, the SEC alleges that it was not just one stockbroker but an entire financial firm that defrauded investors and allowed a billionaire to profit.

According to the Forbes blog on 4/16/10, Goldman Sachs allegedly created a collaterized debt obligation (CDO) in 2007 that included subprime real estate exposure. This CDO was created with the help of Paulson & Co., a hedge fund that actually bet that the CDO would fail. Paulson & Co. reportedly paid Goldman Sachs to structure transactions allowing the hedge fund to short parts of the CDO and the CDO failed.

The SEC alleges that Goldman Sachs committed securities fraud by not telling investors about the role Paulson & Co. played in helping create the CDO it took short positions against. The specific CDO involved in the charges is the Abacus 2007-AC1 CDO.

Forbes notes that there could be massive lawsuits filed against Goldman Sachs, including suits from investors such as ABN Amro, which reportedly lost $840 million in the Abacus CDO. Officials estimate that investors lost more than $1 billion in the CDO.

According to the 4/17/10 edition of the New York Times, Goldman Sachs went so far as to tell investors that the bonds were chosen by an independent manager. Instead, Paulson was permitted to select bonds that he felt were most likely to lose value. The CDO was sold to foreign banks, pension funds and insurance companies, who would only profit if the bonds gained value.

The SEC also charged Fabrice Tourre, a vice president at Goldman Sachs who helped create and sell the CDOs. So far, the charges against Goldman Sachs are civil and not criminal charges.

Goldman Sachs defended itself by saying the charges were "unfounded in law and fact." It also issued a statement saying that it lost money on the Abacus deal and investors were given extensive information regarding the deal, according to the Times.

The SEC itself has been under fire lately for having missed warning signs about Bernard Madoff's Ponzi scheme. Madoff is now serving time in jail for defrauding investors.