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Citigroup to Pay $285 Million to Settle S.E.C. Charges – NYTimes.com

October 19, 2011 by Leave a Comment

Citigroup agreed to pay $285 million to settle charges that it misled investors in a $1 billion derivatives deal tied to the United States housing market, then bet against investors as the housing market began to show signs of distress, the Securities and Exchange Commission said Wednesday.

The S.E.C. also brought charges against a Citigroup employee who was responsible for structuring the transaction, and brought and settled charges against the asset management unit of Credit Suisse and a Credit Suisse employee who also had responsibility for the derivative security.

The S.E.C. said that the $285 million would be returned to investors in the deal, a collateralized debt obligation known as Class V Funding III. The commission said that Citigroup exercised significant influence over the selection of $500 million of assets in the deal’s portfolio.

Citigroup then took a short position against those mortgage-related assets, an investment in which Citigroup would profit if the assets declined in value. The company did not disclose to the investors to whom it sold the collateralized debt obligation that it had helped to select the assets or that it was betting against them.

via Citigroup to Pay $285 Million to Settle S.E.C. Charges – NYTimes.com.

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SEC’s CDO Cross-hairs: Now Morgan Stanley…Who’s Next? | Westlaw Business

May 14, 2010 by Leave a Comment
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With Morgan Stanley now joining Goldman in its cross-hairs, the SEC is taking aim at synthetic collateralized debt obligation (CDO) activity across Wall Street. It was the Street’s version of fantasy football, played by banks from Merrill to Morgan, with much money and little disclosure (according to the Commission). Other parties and enforcement agencies are now playing pile-up as well, with Federal prosecutors in Manhattan and even AIG jumping into the fray – yet the question is on what grounds…

The hunt for inadequate disclosure is spreading wide on Wall Street. Morgan Stanley, Citigroup, JPMorgan, UBS, and Deutsche Bank are all reportedly under investigation for their roles in synthetic CDO transactions. On the surface the allegations seem substantially similar to the SEC charges filed against Goldman Sachs last month.

The Goldman charges focus on allegedly inadequate disclosure of conflicts of interest related to the structuring of ABACUS 2007-AC1, another synthetic CDO. Like fantasy football teams, these securities were built from whatever “referenced assets” the bank desired — giving them more power, and understanding, than usual, and arguably mandating more disclosure as a result.

via SEC’s CDO Cross-hairs: Now Morgan Stanley…Who’s Next?.

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U.S. Investigating Morgan Stanley Mortgage Deals – WSJ.com

May 12, 2010 by Leave a Comment
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U.S. prosecutors are investigating whether Morgan Stanley misled investors about mortgage-derivatives deals it helped design and sometimes bet against, people familiar with the matter said, in a step that intensifies Washington’s scrutiny of Wall Street in the wake of the financial crisis.

Morgan Stanley arranged and marketed to investors pools of bond-related investments called collateralized-debt obligations, or CDOs, and its trading desk at times placed bets that their value would fall, traders said. Investigators are examining, among other things, whether Morgan Stanley made proper representations about its roles.

Among the deals that have been scrutinized are two named after U.S. Presidents James Buchanan and Andrew Jackson, a person familiar with the matter said. Morgan Stanley helped design the deals and bet against them but didn’t market them to clients. Traders called them the “Dead Presidents” deals.

The probe is at a preliminary stage. Bringing criminal cases involving complex Wall Street deals is a huge challenge for prosecutors. The government must prove beyond a reasonable doubt that a firm or its employees knowingly misled investors, a high bar. The government launches many criminal investigations that end without any charges being filed.

Morgan Stanley wasn’t among the biggest players in the CDO market. Although the firm made money on the Dead President deals, any profit was overshadowed by the $9 billion the firm lost on bullish mortgage bets in 2007, a person familiar with the matter said.

In a step that intensifies Washington’s scrutiny of Wall Street, prosecutors are investigating whether Morgan Stanley misled investors on mortgage-derivatives deals it helped design and sometimes bet against. Amir Efrati discusses the story along with Bob O’Brien. And Sudeep Reddy discusses the Senate’s decision to force the Fed to disclose key details of its loans during the financial crisis.

The investigation grew out of an ongoing civil-fraud investigation launched by the Securities and Exchange Commission in 2009, examining the mortgage-bond business of more than a dozen Wall Street firms, the people said. The Manhattan U.S. Attorney’s office now is investigating some of those firms’ activities in a criminal probe.

via U.S. Investigating Morgan Stanley Mortgage Deals – WSJ.com.

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Litigation Watch: Goldman Getting Ahead of Bad News? | Westlaw Business

May 10, 2010 by Leave a Comment
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Goldman Sachs’s disclosure pendulum appears to have now sharply swung in the other direction. In so doing, Goldman may be charting a new course for itself, and arguably for the broader world of besieged public companies, by disclosing, with detailed exhibits, the filing of several lawsuits against the firm’s leadership. This extensive disclosure stands in marked contrast to its much-criticized decisions to not disclose its 2009 receipt of a Wells Notice from the SEC, among other things.

On its face, this move seems intended to help Goldman get ahead of the steady drip of bad news and lawsuits. While certainly more forthcoming than the once-reticent bank has been, even this apparent openness is selective. The lawsuits by the shareholders were in response to a complaint filed by the SEC…yet the SEC’s own filing is not attached. Likewise, a class action recently filed by named plaintiff Ilene Richman (representing a class of allegedly harmed shareholders in the firm) is also not attached. Both are alluded to in subtle descriptions in the disclosure text itself.

In particular, Goldman has disclosed that multiple shareholders have filed a succession of derivative lawsuits against certain officers and each member of the board of directors. The lawsuits come on the heels of the SEC filing last month charging Goldman Sachs with fraud. The shareholders are accusing Goldman Sachs of failure to implement risk management controls while engaging in the offer and sale of the ABACUS 2007-AC1 offering, a complex synthetic collateralized debt obligation. The lawsuits also accuse Goldman of breach of fiduciary duty and corporate waste. Goldman Chairman and CEO, Lloyd C. Blankfein, has also been individually named in some of the lawsuits.

via Litigation Watch: Goldman Getting Ahead of Bad News?.

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Goldman, Sachs & Co. and Fabrice Tourre | Securities and Exchange Commission

April 17, 2010 by Leave a Comment
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SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 21489 / April 16, 2010

Securities and Exchange Commission v. Goldman, Sachs & Co. and Fabrice Tourre, 10 Civ. 3229 (BJ) (S.D.N.Y. filed April 16, 2010)

The SEC Charges Goldman Sachs With Fraud In Connection With The Structuring And Marketing of A Synthetic CDO

The Securities and Exchange Commission today filed securities fraud charges against Goldman, Sachs & Co. (“GS&Co”) and a GS&Co employee, Fabrice Tourre (“Tourre”), for making material misstatements and omissions in connection with a synthetic collateralized debt obligation (“CDO”) GS&Co structured and marketed to investors. This synthetic CDO, ABACUS 2007-AC1, was tied to the performance of subprime residential mortgage-backed securities (“RMBS“) and was structured and marketed in early 2007 when the United States housing market and the securities referencing it were beginning to show signs of distress. Synthetic CDOs like ABACUS 2007-AC1 contributed to the recent financial crisis by magnifying losses associated with the downturn in the United States housing market.

According to the Commission’s complaint, the marketing materials for ABACUS 2007-AC1 — including the term sheet, flip book and offering memorandum for the CDO — all represented that the reference portfolio of RMBS underlying the CDO was selected by ACA Management LLC (“ACA”), a third party with expertise in analyzing credit risk in RMBS. Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc. (“Paulson”), with economic interests directly adverse to investors in the ABACUS 2007-AC1 CDO played a significant role in the portfolio selection process. After participating in the selection of the reference portfolio, Paulson effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (“CDS”) with GS&Co to buy protection on specific layers of the ABACUS 2007-AC1 capital structure. Given its financial short interest, Paulson had an economic incentive to choose RMBS that it expected to experience credit events in the near future. GS&Co did not disclose Paulson’s adverse economic interest or its role in the portfolio selection process in the term sheet, flip book, offering memorandum or other marketing materials.

The Commission alleges that Tourre was principally responsible for ABACUS 2007-AC1. According to the Commission’s complaint, Tourre devised the transaction, prepared the marketing materials and communicated directly with investors. Tourre is alleged to have known of Paulson’s undisclosed short interest and its role in the collateral selection process. He is also alleged to have misled ACA into believing that Paulson invested approximately $200 million in the equity of ABACUS 2007-AC1 (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. The deal closed on April 26, 2007. Paulson paid GS&Co approximately $15 million for structuring and marketing ABACUS 2007-AC1. By October 24, 2007, 83% of the RMBS in the ABACUS 2007-AC1 portfolio had been downgraded and 17% was on negative watch. By January 29, 2008, 99% of the portfolio had allegedly been downgraded. Investors in the liabilities of ABACUS 2007-AC1 are alleged to have lost over $1 billion. Paulson’s opposite CDS positions yielded a profit of approximately $1 billion.

The Commission’s complaint, which was filed in the United States District Court for the Southern District of New York, charges GS&Co and Tourre with violations of Section 17(a) of the Securities Act of 1933, 15 U.S.C. §77q(a), Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §78j(b) and Exchange Act Rule 10b-5, 17 C.F.R. §240.10b-5. The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest and civil penalties from both defendants.

via Goldman, Sachs & Co. and Fabrice Tourre.

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