The Work

August 10, 2010 1:01 PM

Goldman Still in Hot Water Over Abacus Deal?

Posted by Zach Lowe

In April, our colleague Sue Reisinger of Corporate Counsel asked a pertinent question about Goldman Sachs's handling of the Securities and Exchange Commission's lawsuit accusing the bank of failing to tell investors that a bearish hedge fund manager had helped select the contents of a collateralized debt obligation--with the intent of betting against it.

The question: Should Goldman have disclosed to investors that the SEC had hit it with a Wells notice about the investigation in early 2009--or were the bank and its general counsel, Gregory Palm, right that they were under no legal obligation to disclose the Wells notice? Goldman did not mention the matter until the SEC filed suit against the bank in April--about a year after the arrival of the Wells notice.

Reisinger's question turned out to be prophetic. In a regulatory filing Monday, Goldman acknowledged that regulators both here and in the U.K. are investigating the disclosure issues surrounding the failed CDO, according to the Daily Telegraph and Reuters.

As you surely know, Goldman settled the underlying fraud case with the SEC last month, when it agreed to pay a record $550 million in fines and restitution, according to our prior reporting. Under the terms of the settlement, Goldman did not admit to any securities violations but conceded its disclosures about the CDO, called Abacus, were "incomplete." In its SEC filing Monday, the bank said it was a "mistake" not to inform investors more accurately about the nature of the Abacus CDO.

The regulatory filing says the Financial Industry Regulatory Authority and the U.K.-based Financial Services Authority are both investigating whether Goldman should have disclosed the Wells notice earlier. As Reisinger reported in April, the issue is murky and turns on whether the Wells notice would be "material" to investors. Sullivan & Cromwell's Richard Klapper and Gregory Craig of Skadden, Arps, Slate, Meagher & Flom advised Goldman on its settlement with the SEC. We reached out to both today; Klapper did not immediately return our messages, and Craig declined to comment. We'll let you know when we learn more.

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