Goldman Sachs Initial Defense From SEC Wells Notice (9/2009)

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Here is Goldman's initial defense or response to the Wells Notice (potential charge) in September 2009. Below I quoted the first page of the Preliminary Statement for an introduction. I found the documents at NYT DealBook. Sullivan & Cromwell is Goldman's law firm.

In early 2007, Goldman Sachs acted as the underwriter of privately-placed notes issued in a synthetic CDO transaction known as ABACUS 2007-AC1 (“2007-AC1”). There was nothing unusual or remarkable about the transaction or the portfolio of assets it referenced. Like countless similar transactions during that period, the synthetic portfolio consisted of dozens of Baa2-rated subprime residential mortgage-backed securities (“RMBS”) issued in 2006 and early 2007 that were identified in the offering materials (the “Reference Portfolio”). As in other synthetic CDO transactions, by definition someone had to assume the opposite side of the portfolio risk, and the offering documents made clear that Goldman Sachs, which took on that risk in the first instance, might transfer some or all of it through a hedging and trading strategies using derivatives. Like other transactions of this type, all participants were highly sophisticated institutions that were knowledgeable about subprime securitization products and had both the resources and the expertise to perform due diligence, demand any information that was important to them, analyze the portfolio, form their own market views and negotiate forcefully at arm‟s length. And like other transactions with similar lower-rated subprime portfolios, 2007-AC1‟s performance was battered by the unprecedented subprime market meltdown, which has impaired cashflow to countless noteholders in such transactions and caused many participants in the market to fail altogether.

Now, with the benefit of perfect hindsight about the magnitude of the market downturn, the Staff proposes to charge Goldman Sachs with misrepresenting material facts relating to the offering. Notably, the Staff does not contend that anything about the Reference Portfolio itself was incorrectly disclosed. Rather, the Staff‟s theory relates exclusively to the role of Paulson & Co., Inc. (“Paulson”) – now recognized as a heavy bettor against the subprime market but at the time a relatively unknown hedge fund manager – in making suggestions to the" [........] 
Continue reading at NYT Dealbook.

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