Our Terms of Service and Privacy Policy have changed.

By continuing to use this site, you are agreeing to the new Privacy Policy and Terms of Service.

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

Index Last Change % Change
Dow 16,075.05 -299.71 -1.83%
Nasdaq 4,672.24 -61.26 -1.29%
S&P 500 1,917.77 -33.36 -1.71%
Treasuries 2.12 -0.04 -2.03%
Data as of 1:09pm ET
Company Price Change % Change
Bank of America Corp... 15.54 -0.39 -2.48%
Apple Inc 108.76 -1.61 -1.46%
Alcoa Inc 9.52 -0.05 -0.52%
Micron Technology In... 16.80 0.21 1.24%
Microsoft Corp 42.46 -1.04 -2.39%
Data as of 12:54pm ET
Sponsors

Sections

The Force wasn't the only thing to awaken just after midnight on September 4. Cash registers sprang into life as fans flocked to buy new products tied to the latest Star Wars move. More

Harlem's Hot Bread Kitchen teaches kitchen skills to low-income immigrant so they can find employment. More

Google has released Chrome 45, which claims to make your browser faster and give your laptop battery extra life. More

Harlem's Hot Bread Kitchen teaches kitchen skills to low-income immigrant so they can find employment. More

Pimco's famous fund once managed by star manager Bill Gross has less than $100 billion in management for the first time since 2007. More