Posted on 21 Apr 2010
According to sources, American International Group Inc. (AIG) leads the directors and officers liability coverage for Goldman Sachs Group Inc., who is being sued by the Securities and Exchange Commission for fraud in connection with its structuring and marketing of a mortgage-related debt security.
New York-based AIG is the lead participant in a Side A D&O tower that was placed by Aon Corp., market sources said.
AIG declined to comment. A spokesperson for Chicago-based Aon could not be reached.
Goldman's shares closed Tuesday at $159.98, down 13.2% from last Thursday's close.
The SEC last Friday charged New York-based Goldman with making material mis-statements and comissions in connection with a synthetic collateralized debt obligation.
Goldman reportedly did not disclose to investors that it had received a so-called Wells notice from the SEC in 2009. A Wells notice is a letter from the SEC stating it intends to begin enforcement proceedings against the recipient.
The CDO at the center of the SEC's civil suit, ABACUS 2007-AC1, was tied to the performance of subprime residential mortgage-backed securities and was structured and marketed in early 2007, when the U.S. housing markets and the securities tied to it were beginning to show signs of distress, according to the SEC complaint.
The SEC says Goldman Sachs did not disclose that a large hedge fund, Portland, Ore.-based Paulson & Co. Inc., effectively shorted the underlying subprime residential mortgage-backed securities portfolio it had helped select by entering into credit default swaps with Goldman Sachs to buy protection on specific layers of the ABACUS capital structure.
“In sum, (Goldman Sachs) arranged a transaction at Paulson’s request in which Paulson heavily influenced the selection of the portfolio to suit its economic interests but failed to disclose to investors, as part of the description of the portfolio selection process contained in the marketing materials used to promote the transaction, Paulson’s role in the portfolio selection or its adverse economic interests,” says the complaint.
This violated securities regulations, says the complaint.
By January 2008, nine months after the deal closed, 99% of the portfolio had been downgraded, and investors in the CDO had lost more than $1 billion, while Paulson’s opposite positions yielded a profit of about $1 billion for the firm, according to the complaint.
Goldman said the SEC’s suit is “completely unfounded.”
Goldman insured seven of its ABACUS deals with American International Group Inc., but these do not include the ABACUS deal cited in the SEC complaint.
However, the Financial Times reported Tuesday that AIG may be looking at recovering some of its roughly $2 billion in losses related to guarantees on Goldman CDOs.