GLOBAL - Investment bank Goldman Sachs is expected to face yet more pressure over its recent activity in collateral debt obligations (CDOs) as a legal firm says work on class actions, alleging the firm failed to disclose material information affecting its share price, could begin against the investment bank within the next week.
Goldman Sachs is already under significant public scrutiny following allegations of fraud laid by the US Securities and Exchange Commission (SEC) concerning its handling of the Abacus 2007-AC1 CDO, which had a limited number of investors but is alleged to have been created with the knowledge that it would be shorted by Paulson & Co, when investors on the long side were not aware.
The UK's Financial Services Authority has confirmed it is also investigating the UK division of Goldman Sachs, while German regulatory authorities may get involved too.
The narrow range of claims filed by the SEC are complex as they allege Goldman created a CDO which were designed to lose money even though other parties were not aware of the possible shorting or the other party involved.
However, Goldman has answered claims by arguing ACA Capital Management, the largest investor and IKB, the German bank, were given "extensive disclosure" about the underlying mortgage securities, particularly as ACA is said to have approved the portfolio, while investors understood the synthetic CDO could include a long and short side.
This is unlikely to be enough to sway investors in Goldman Sachs, however, according to Thomas Dubbs, partner at legal firm Labaton Sucharow.
He said work on class action lawsuits by major US state pension funds could start as early as next week, alleging misinformation has affected the company's share price. Goldman's share value has rebounded a fraction since the allegations surfaced last Friday (16 April) but was still down at least 12% by 16:00 CET today.
"I would anticipate a class action to be initiated within the US over the course of the next week," said Dubbs. "Thereafter, I would anticipate major state pension funds and other institutions to vie for leadership of that case."
He continued: "These institutions, as well as the market in general, seem to believe the Abacus situation reflects a more systemic situation at Goldman."
Goldman has strenuously denied any misinformation and fraud claims made concerning this particular CDO transaction and stated: "We are disappointed that the SEC would bring this action related to a single transaction, in the face of an extensive record which establishes that the accusations are unfounded in law and fact."