Goldman Sachs settles Abacus CDO lawsuit

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Goldman Sachs will pay an undisclosed amount of money to settle another lawsuit stemming from its actions in the run-up to the financial crisis, Reuters is reporting.

ACA Financial Guaranty Corp brought the lawsuit against Goldman Sachs, accusing the company of lying about a pool of securities backed by subprime mortgages tied to the failed Abacus collateralized debt obligation.

ACA Financial originally filed the lawsuit in 2011 and it’s weaved its way through the legal system since then.

A New York judge allowed the lawsuit to proceed in 2012, but an appeals court reversed that ruling in 2013.

ACA Financial then asked the New York Supreme Court to reverse the lower appeals court’s ruling, a request that the New York Supreme Court granted in 2015.

Now the parties are settling.

ACA Financial originally wanted $120 million, but the settlement terms were not made public.

Here’s more on the settlement from Reuters:

ACA Financial Guaranty Corp claimed Goldman and the hedge fund headed by John Paulson tricked it into insuring the CDO, which was tied to subprime mortgage securities.

A filing in New York state court on Wednesday discontinued the case with prejudice against Goldman and Paulson Co. The terms of the settlement were not made public.

In the $120 million lawsuit, ACA claimed it was deceived into believing Paulson Co would hold Abacus long-term. Instead, the fund helped select the assets and took a short position, betting the underlying mortgages would fail, the lawsuit said.

The insurer claimed Abacus was designed so that Paulson could reap “huge profits” and Goldman “huge fees.”

In 2010, the Securities and Exchange Commission ordered Goldman Sachs to pay more than $500 million for its role in the Abacus CDO.

Here’s how HousingWire’s Jacob Gaffney described that fine in 2010:

The $550m fine comes as Goldman acknowledges that its marketing materials for the subprime mortgage products “contained incomplete information,” according to an SEC statement. As a result, investors in synthetic collateralized debt obligation, which perform only as well as the underlying subprime mortgage collateral, had “key facts” and “vital information” knowingly withheld.

Of the $550m to be paid by Goldman in the settlement, $250m would be returned to harmed investors through a Fair Fund distribution and $300m would be paid to the U.S. Treasury. The SEC alleged that Goldman failed to disclose this knowledge of the CDO, known as ABACUS 2007-AC1, as well as the role that hedge fund Paulson Co. played in the portfolio selection process and the fact that Paulson had taken a short position against the CDO.

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