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Goldman's liability could reach $700 million

By Ben Rooney, staff reporter

NEW YORK (CNNMoney.com) -- Goldman Sachs could face a liability of more than $700 million as a result of charges it misled investors, according to a recent research report.

Brad Hintz, senior analyst at Bernstein Research, estimates that the charges could cost Goldman a total of $706.5 million, or $1.20 per share, over the next few years.

The Securities and Exchange Commission announced Friday it is suing Goldman for failure to disclose conflicts in a 2007 sale of a so-called collateralized debt obligation (CDO). Investors in the CDO, known as Abacus 2007-AC1, ultimately lost $1 billion.

In addition to the SEC case, many investors in Abacus are expected to file related claims against Goldman Sachs.

Among the counterparties expected to pursue claims against Goldman are IKB Deutsche Industriebank, a commercial bank in Germany, and Netherlands-based ABN AMRO.

"IKB and other disappointed Abacus investors will almost certainly pursue related CDO claims against Goldman," Hintz wrote in the research report. "But these claims still face a challenging hurdle."

In its civil complaint, the SEC alleged that Goldman allowed hedge fund Paulson & Co. - run by John Paulson, who made billions of dollars betting on the subprime collapse - to help select securities in the CDO.

Goldman didn't tell investors that Paulson was shorting the CDO, or betting its value would fall. When the CDO's value plunged within months of its issuance, Paulson walked off with $1 billion, the SEC said.

In response, Goldman (GS, Fortune 500) argued that IKB and ACA, the subsidiary of ABN that was bought by Royal Bank of Scotland in 2007, were given "extensive information" about the underlying mortgage securities in Abacus.

"The risk associated with the securities was known to these investors, who were among the most sophisticated mortgage investors in the world," Goldman said in a statement Friday. "These investors also understood that a synthetic CDO transaction necessarily included both a long and short side."

Hintz said the Abacus CDO was not considered a registered security and that investors signed documents stating they understood the risks involved. As a result, he said the investors will base their cases on the argument that Goldman provided limited or misleading information about the deal.

"If plaintiffs can prove that CDO disclosures are materially misleading, then Abacus and Goldman may have violated the anti-fraud provisions of the federal securities laws," he said. "These findings could serve as grounds for breach of contract or negligent misrepresentation claims." To top of page

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