Goldman Sachs Settles Suit Over CDO That Became Crash Symbol

  • Australian fund Basis Yield Alpha Fund sued bank in 2011
  • Terms of agreement not detailed in June 10 court filing

Goldman Sachs Group Inc. and an Australian hedge fund agreed to end a $1 billion lawsuit over the sale of mortgage-linked securities, including an investment known as “Timberwolf” that became a symbol of the financial crisis after it was cited in internal e-mails released by U.S. lawmakers.

Terms of the agreement weren’t detailed in a June 10 court filing in state court in Manhattan.

Basis Capital’s Basis Yield Alpha Fund sued Goldman Sachs in 2010, accusing it of making false statements in connection with the sale of Timberwolf and another investment known as Point Pleasant. Both were collateralized debt obligations, or CDOs, a type of security stuffed with mortgages and their derivatives that caused billions in losses during the 2008 financial crisis. The fund sought more than $67 million it said it lost in the deal and $1 billion in punitive damages.

Timberwolf became notorious after an e-mail by a former Goldman Sachs executive, Thomas Montag, describing it as “one shi--y deal” was released by U.S. lawmakers investigating the bank that year. In an April 2011 report, the U.S. Senate said Goldman Sachs tried to manipulate prices of derivatives linked to subprime home loans in May 2007 for their own benefit.

For more news on the U.S. Senate report, click here.

Michael Duvally, a spokesman for New York-based Goldman Sachs, declined to comment on the agreement. Bruce Grace, a lawyer for Basis Yield Alpha Fund, didn’t immediately respond to requests for comment on the settlement.

The fund alleged that Goldman Sachs falsely claimed that the market for investments such as Timberwolf had stabilized while knowing they were likely to go into sharp decline. The securities plunged in value within weeks after it bought them, forcing the fund into insolvency, according to the complaint. Goldman Sachs said at the time the suit was filed that the complaint was a “misguided attempt” by the fund to shift its investment losses to the bank.

A federal judge threw out the case in 2010, and the fund then sued Goldman in state court. A judge denied the bank’s bid to dismiss the case in October 2012, a ruling upheld by an appeals court in January 2014.

Senate Report

Timberwolf was one of four Goldman Sachs CDOs detailed in the 2011 Senate report that found that the company misled clients about mortgage-backed securities. Another was Abacus, the CDO at the center of a Securities and Exchange Commission case that led to a $550 million settlement in 2010 to resolve claims over the marketing of the securities. It was the largest penalty ever levied by the SEC against a Wall Street firm.

A federal jury in Manhattan in August 2014 found former Goldman Sachs vice president Fabrice Tourre liable for his role in Abacus and ordered him to pay $825,000. The SEC accused Tourre, a native of France, of intentionally misleading investors about the role played by Paulson & Co., the hedge fund of billionaire John Paulson which helped choose the portfolio of securities, then made a billion-dollar bet it would fail.

The case is Basis Yield Alpha Fund v. Goldman Sachs Group Inc., 652996/2011, New York State Supreme Court, New York County (Manhattan).

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