Paulson & Co., the hedge fund that made $15 billion betting on the decline in subprime mortgages in 2007, said its role in helping to design a mortgage-linked deal sold by Goldman Sachs Group Inc. was “appropriate and conducted in good faith,” according to a letter sent to investors.
The Securities and Exchange Commission sued Goldman Sachs for fraud on April 16, saying it failed to disclose that Paulson & Co. helped choose securities for a so-called synthetic collateralized debt obligation and then wagered that it would collapse. Goldman Sachs told clients the securities included in the deal were selected by ACA Management LLC, an independent third party, according to the regulator.
“We have always been forthright in expressing our opinions, and we never misrepresented our positions,” John Paulson, the firm’s founder, wrote in the letter dated April 20. “All our dealings were through arms-length transactions with experienced counterparties who had opposing views based on all available information at the time.”
Paulson & Co. has not been accused of any wrongdoing and was not named in the suit. The SEC said that it didn’t sue the firm because it was Goldman Sachs’s job to disclose to investors how the CDO was constructed.
Several Paulson & Co. investors, including Geneva-based 3A SA, which farms out money to hedge funds, said they weren’t concerned by the firm’s involvement with the CDO.
Paulson, 54, has reached out to clients to answer questions. He spoke to a group of investors by telephone on April 19, according to two clients. In a conference call this morning for all investors, firm executives said redemption requests for June 30, which must be received by April 30, were below normal levels, said two people who listened to the meeting and asked not to be named because the information is private.
Armel Leslie, a spokesman for Paulson & Co., declined to comment on the letter, which was reported earlier by the Wall Street Journal, and on the conference call.
Paulson & Co. wasn’t involved in the marketing of the investment, called Abacus 2007-ACI, and didn’t have authority to select the portfolio of residential mortgage-backed securities on which it was based, Paulson said in the letter.
ACA chose 55 securities that Paulson suggested for inclusion in the CDO and rejected 68, the letter said, citing the SEC complaint. ACA also added 35 other securities.
Paulson said that many investors were eager in 2007 to wager that mortgage securities’ value would continue to rise.
‘Bet Against Us’
“When we expressed our concerns about the mortgage markets, many of the most sophisticated investors in the world, who had analyzed the same publicly available data we had, were fully convinced that we were wrong, and more than willing to bet against us,” he wrote. He added that at the time, Paulson & Co. was not known as an experienced mortgage investor.
Paolo Pellegrini, who was behind the subprime trade at Paulson, told the SEC in 2008 that he informed ACA that his hedge fund was betting against the CDO, according to CNBC, which didn’t say where it got the information.
Carolyn Sargent, a spokesman for Pellegrini, declined to comment on the report.
Paulson & Co. is the world’s third-biggest hedge fund, with $32 billion in assets, thanks in large part to its bet that subprime mortgages would tumble. The trade earned the firm roughly $3 billion in fees in 2007.
The firm’s Advantage Plus fund, its largest, jumped 160 percent that year with the subprime wager. Its Credit Opportunities funds, which held the biggest chunk of the firm’s bet, were up 600 percent.
Advantage Plus fund’s assets were $10.1 billion in 2009, down 16 percent from a year earlier, according to a March 26 investment adviser registration filed by Paulson & Co. The Credit Opportunities funds were listed at $6.9 billion, a 31 percent decline.
Paulson’s gold fund, which started in January 2009, had about $346.5 million in assets by the end of the year, according to the firm’s registration. His real estate recovery fund had about $200 million in assets. The Paulson Recovery Fund, formed at the end of 2008 to bet on financial-services companies such as Citigroup Inc. and Bank of America Corp., had about $1.71 billion in assets, up from $655 million reported previously.
The SEC’s suit doesn’t bode well for the entire U.S. financial services industry, said Ed Rogers, chief executive officer of Tokyo-based hedge-fund adviser Rogers Investment Advisors Y.K.
“You don’t want to be the company or industry that the U.S. government loves to hate,” he said.