Goldman Sachs is facing yet another lawsuit involving toxic synthetic collateralized debt obligations (CDOs). Australian hedge fund manager Basis Capital’s Yield Alpha Fund claims it was defrauded by Goldman when it purchased $78 million of the Timberwolf CDOs in June 2007 and that Goldman knew at the time of the sale the securities were destined to fail as the mortgage market began to decline.
Basis Capital is seeking more than $1 billion in damages.
The lawsuit comes on the heels of another fraud lawsuit against Goldman Sachs. In April, the Securities and Exchange Commission (SEC) filed a civil suit against Goldman in connection to the sale of a synthetic CDO known as Abacus. As reported June 9 by the Wall Street Journal, Goldman and the SEC are reportedly working to settle that case, which could cost Goldman between $500 million and $1 billion in fines.
Emails will likely play a central role in the Basis Capital case. According to complaint, one email from a former Goldman executive describes the $1 billion Timberwolf CDO as “one s—-y deal.”
Basis Capital was forced to liquidate the Basis Yield Alpha Fund in late 2007 after sustaining heavy losses betting on the subprime mortgage market, including buying instruments like Timberwolf.
“Goldman was pressuring investors to take the risk of toxic securities off its books with knowingly false sales pitches,” said Eric L. Lewis of Baach Robinson & Lewis PLLC, Basis Yield Alpha Fund’s lead counsel, in the Wall Street Journal article. “Goldman should be called to account for its deception of BYAFM and other investors who were misled.”