By Eric Johnston
A LANDMARK $US550 million ($A625 million) settlement between investment bank Goldman Sachs and US regulators over claims that it misled investors, has substantially boosted an Australian hedge fund's high-stakes legal action against the Wall Street behemoth and its local offshoot.
Basis Capital is pushing ahead with a $US1 billion claim against Goldman, which it blames for the collapse of one of its investment funds. This case and the separate matter settled early yesterday between the investment bank and the US Securities and Exchange Commission have striking similarities.
Both centre on claims that highly sophisticated investors were misled by Goldman's efforts to sell mortgage-linked securities just as cracks were appearing in the US housing market. The two cases are being heard separately by the same US District Court judge.
Lawyers for Basis told BusinessDay yesterday that the SEC settlement gave momentum for Goldman to settle other legal woes facing the company.
While the penalty struck between Goldman and the SEC marks the largest ever levied by the regulator against a Wall Street company, it represents a mere two weeks of profits for the bank. The settlement, which still needs to be approved by a US court, has come in at almost half the size that many analysts expected.
A surge in Goldman's New York-based shares suggested as much. They gained as much as 5 per cent in after-hours trade.
''This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing,'' said the SEC's enforcement director, Robert Khuzami.
The civil suit brought by the SEC centred on a single mortgage security that Goldman created in 2007. That security, called Abacus, enabled a prominent hedge fund manager, John Paulson, to place a bet against mortgage bonds.
The commission contended that Goldman misled investors because it did not disclose Paulson's involvement in the deal.
The SEC settlement comes a little over a month after Basis launched a legal action against Goldman Sachs and its Australian arm, claiming one if its funds had been misled into buying a toxic security packed full of US subprime mortgages that eventually contributed to its collapse.
Australian investors have lost $A320 million in the collapse of Basis Yield fund.
In its filing, Basis portrays moves by the investment bank to make large bets against the securities even as it was reassuring clients they were sound.
''The [Basis] case is much more clear and starker than Abacus, where Goldman admitted it should have disclosed selection of collateral,'' said Eric Lewis, a Washington-based partner with the law firm advising Basis.
A Goldman spokeswoman said yesterday the Abacus settlement had no impact on the Basis claim and it continued to vigorously defend the matter.
The news that Goldman had struck a deal with regulators has also removed pressure from its chief executive and chief executive, Lloyd Blankfein, who was speculated to be in the firing line as negotiations with US authorities dragged on.
Goldman acknowledged that the marketing materials for Abacus ''contained incomplete information''.
Under the proposed settlement, Goldman would pay back the $US15 million in profit it made from the Abacus deal and pay a civil penalty of $US535 million. The money would be given to the two banks that had losses on the deal - $US150 million to Germany's IKB Deutsche Industriebank and $US100 million to the Royal Bank of Scotland Group - with the rest, $US300 million, going to the US Treasury as a fine.
With NEW YORK TIMES