In an unexpected turn of events, Bloomberg reported on Friday that Goldman Sachs Group Inc. (GS) succeeded in obtaining a stay of execution from the Securities and Exchange Commission (SEC) in the U.S. Accordingly, SEC has now postponed Goldman’s trial date for civil-fraud litigation to July 19, 2010 from June 21, 2010.
On April 16, 2010, Goldman was charged by the SEC for misstating facts and selling bad quality subprime investments to its customers in 2006, without disclosing the risk factors including the vital role of Paulson & Co., a prime hedge fund, in the portfolio selection process.
Particularly, Goldman was slapped with charges by the SEC this time given that the company misrepresented the fact that the hedge fund had taken a short position against the collateral debt obligation (CDO) called Hudson Mezzanine 2006-1. Additionally, the SEC accused the investment bank of creating a CDO called Abacus 2007-AC1, which comprised mortgage-backed securities.
CDOs typically repackage bonds and other assets into new securities. These are not traded on a public exchange, allowing firms like Goldman to generate fees by brokering deals between buyers and sellers. However, CDOs performed grimly as they were invested in securities comprising subprime mortgages, which are known to have a larger-than-average risk of defaulting in the market. Eventually, the market downturn dashed the hopes of the investment banker and led to huge losses for investors.
Moreover, the SEC has also charged Goldman of being involved with a hedge fund like Paulson & Co. who had picked most of the bad-quality securities for investment, taking a short position and betting on them to perform poorly in the open market. Paulson & Co. has reportedly earned around $1 billion through this deal.
While the SEC has started inquiring into Goldman’s complex mortgage-backed deal, it is also trying to find out whether investors were provided with adequate disclosure regarding such transactions. This validates the SEC’s decision to extend the time-frame of the trial, so that Goldman can submit all official and confidential documents.
Additionally, it is believed that the time extension not only gives a breather to Goldman but also provides adequate scope for considering other alternatives such as a settlement without trial
Apart from this civil fraud litigation, the SEC is also planning to probe the investment practices of other industry giants such as Bank of America Corp. (BAC), Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM). Further, taking a cue from the U.S. government’s interrogation, the financial watchdogs of the U.K. and other European nations have also been directed to scrutinize the investment operations of Goldman in their jurisdictions.
Overall, we believe that issues like these could severely shatter investors’ confidence as a giant like Goldman is believed to be well positioned in the industry to realize the full benefits of its strategic cost-balancing initiatives and attractive business mix. Moreover, these issues are likely to cast a shadow over the financials of the company. If the CDO charges are affirmed, Goldman will have to initiate damage control, which is estimated to exceed a $1 billion. This could significantly dent the company’s financials and market reputation.
Read the full analyst report on “GS”
Read the full analyst report on “BAC”
Read the full analyst report on “C”
Read the full analyst report on “JPM”
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