As predicted, Goldman Sachs announced hefty first-quarter profits of $3.5 billion. The news, which comes amid fraud charges by the Securities and Exchange Commission (SEC) that Goldman knowingly duped investors, may be good for the bank but could lend further credence to the notion of Wall Street making profits at the expense of investors.

“Their reputation is at stake. Ironically, if there was a day that Goldman Sachs wishes that their results were not so good, it’d probably be today,” said Suzy Welch, business and economic issues contributor for ABC News, during an April 20 appearance on Good Morning America. “What makes people mad in the first place is the fact that Goldman makes so much money and perhaps profited off of other people’s suffering, and here they are making more money. Could it get more outrageous?”

On the April 20 earnings call, Goldman Sachs said it was “surprised” by the charges filed by the SEC on April 16. The focus of the SEC’s claims center on a risky mortgage product called Abacus that Goldman Sachs sold to investors but allegedly did not disclose details about another client, Paulson & Company, that helped selected the underlying securities in Abacus and then bet against it to fail.

The SEC claims that Paulson & Company made $1 billion from the deal, while investors lost billions. Goldman Sachs received $15 million as the “middleman” of the transaction.

Also named in the SEC’s lawsuit is Goldman Sachs Vice President Fabrice Tourre. Tourre is alleged to have created and sold the product in question while knowing its risks but keeping them to himself. In a 2007 e-mail, Tourre writes the following:

“More and more leverage in the system, the whole building is about to collapse anytime now. “Only potential survivor, the fabulous Fab … standing the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!”

In addition to the SEC’s charges, the UK’s regulatory agency also plans to begin a formal enforcement investigation into another alleged fraud scheme by the Goldman Sachs that may have cost the Royal Bank of Scotland millions of dollars.

The “Fabulous Fabrice Tourre,” as he refers to himself in an e-mail cited in an April 16 securities fraud lawsuit filed by the Securities and Exchange Commission, is reportedly set to rake in a massive bonus courtesy of his employer Goldman Sachs.

An April 18 story in the Guardian first reported the bonus news, which is set to be announced on April 20 by Goldman Sachs CEO Lloyd Blankfein as part of the first-quarter 2010 financial results for the bank.

News of Tourre’s potential bonus comes on the heels of the SEC’s lawsuit against the VP and Goldman Sachs over claims involving a package of collateralized debt obligations – called Abacus 2007-AC1 – that regulators contend was designed to fail. According to the civil complaint, Tourre knew that the hedge fund, Paulson and Company, had helped select the assets backing Abacus while at the same time betting on it fail.

The SEC further alleges that Tourre misled a collateral manager, ACA Management, about Paulson’s role.

“Marketing materials for Abacus 2007-AC1 were false and misleading because they represented that ACA selected the reference portfolio while omitting any mention that Paulson, a party with economic interests adverse to CDO investors, played a significant role in the selection of the reference portfolio,” the complaint reads.

The SEC’s complaint also includes potentially damning e-mails from Tourre about Abacus. One of those e-mails states the following:

“Only potential survivor, the fabulous Fab standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!”

According to an April 19 article in the Wall Street Journal, Tourre received a paycheck of more than $2 million in 2007. The compensation was reportedly due in part to the success of the CDO at the center of the SEC’s lawsuit. Meanwhile, Tourre apparently has taken an “indefinite vacation” but remains employed at Goldman Sachs.

The fraud lawsuit involving Fabrice Tourre and Goldman Sachs may be just the tip of the iceberg for Wall Street. On April 16, the SEC accused Tourre, a VP at Goldman Sachs, and the bank of creating and selling high-risk collateralized debt obligations tied to mortgages without disclosing to investors the role of a hedge that helped picked the underlying securities and then bet against them to fail.

A number of analysts now say the probe may prompt additional investigations in CDOs at other Wall Street firms.

“This is probably just the tip of the iceberg,” said Chizu Nakajima, director of the Centre for Financial Regulation and Crime at Cass Business School in London, in an April 19 article in Investment News. “As far as other financial institutions are concerned, they are obviously very worried. If the SEC’s action is actually successful, it could well open up the gates to other litigation worldwide.”

Besides Goldman Sachs, at least 20 banks arranged more than $400 billion CDO deals in 2007 – the same time that the U.S. housing market began to collapse. Citigroup was the leader of those deals, followed by Merrill Lynch and Deutsche Bank, according to the Investment News story.

The New York Post reported this morning that the SEC is now investigating transactions structured by other big players in the CDO market, including Deutsche Bank, UBS and Merrill Lynch.

A recent lawsuit against Fabrice Tourre may be emblematic of public sentiment regarding Wall Street. The Securities and Exchange Commission (SEC) filed a civil lawsuit against Tourre and his employer, Goldman Sachs, on April 16, accusing the duo of defrauding investors by misstating and omitting key facts about a financial product tied to mortgage-related investments.

The focus of the lawsuit is on a collateralized debt obligation that Tourre created. The performance of that CDO, called Abacus, was linked to the performance of the housing market. When the housing market tanked, so, too, did Abacus. The SEC isn’t focused on that aspect, however. Its lawsuit concerns a hedge fund, Paulson & Co., which selected the losing assets that went into Abacus and then bet against them. Goldman never revealed Paulson’s role to investors, according to the SEC.

Meanwhile, another company became involved in the deal – ACA Management. Allegedly, Goldman and Tourre convinced ACA that Paulson was investing in Abacus, instead of betting against it.

The SEC’s complaint accuses Tourre as the person principally responsible for ABACUS 2007-AC1. Tourre structured the transaction, prepared the marketing materials, and communicated directly with investors, the SEC says. Tourre also allegedly knew of Paulson & Co.’s undisclosed short interest and role in the collateral selection process.

In addition, Tourre is charged with misleading ACA into believing that Paulson & Co. invested approximately $200 million in the equity of ABACUS, indicating that Paulson & Co.’s interests in the collateral selection process were closely aligned with the interests of ACA. In reality, however, their interests were sharply conflicting.

In the end, Paulson paid Goldman $15 million for putting Abacus together. Investors lost more than $1 billion, while Paulson made a profit of $1 billion, the SEC says.

The name Fabrice Tourre probably wasn’t widely recognized – until now. The Securities and Exchange Commission (SEC) filed a civil lawsuit against the Goldman Sachs broker and his employer last week for their connection to a complex financial product – known as Abacus 2007-AC1 – that was filled with equally complex and high-risk synthetic collateralized debt obligations (CDOs).

According to the SEC’s 22-page complaint, Goldman and Tourre are alleged to have knowing deceived investors when they marketed and sold Abacus. In addition, the SEC says Goldman failed to disclose that one of its clients, Paulson & Co., actually helped choose the risky securities that were packaged into Abacus. Moreover, Goldman did not disclose that Paulson, one of the world’s largest hedge funds, had bet that the value of the securities would fall, the SEC says.

Tourre was the mastermind behind the creation of Abacus, and agreed to the deal with Paulson in April 2007, the SEC claims. Regulators allege, however, that Tourre knew the market in mortgage-backed securities was about to be hit well before April 2007.

The SEC’s April 16 lawsuit against Goldman Sachs and Tourre contains a number of potentially incriminating e-mails from Tourre, one of which reads as follows:

“More and more leverage in the system. Only potential survivor, the fabulous Fab[rice Tourre]… standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!”

Tourre, 31, currently resides in London as executive director of Goldman Sachs International. He’s apparently worked for Goldman since 2001.

French trader Fabrice Tourre and his employer, Goldman Sachs, are being sued by the Securities and Exchange Commission (SEC) for allegedly devising a package of highly risky credit default swaps (CDS) and then betting against the investments – and their clients – to fail. The deals produced massive losses for investors but big profits for Tourre and, ultimately, for Goldman Sachs.

The SEC filed its civil lawsuit on April 16, and the move seems to confirm what many people have long believed: The world of Wall Street is indeed rigged, and investors are the ones who wind up on the losing end.

“The SEC suit against Goldman, if proven true, will confirm to people their suspicions about the total selfishness of these financial institutions,” said Steve Fraser, a Wall Street historian, in an April 18 article in the New York Times. “There’s nothing more damaging than that. This is way beyond recklessness. This is way beyond incompetence. This is cynical, selfish exploiting.”

Tourre is the only Goldman Sachs employee named in the SEC’s complaint. As for the deals Tourre created, they consisted of collateralized debt obligations (CDOs), which were contingent on the performance of risky mortgage-related securities. Those details, however, were never disclosed to investors, according to the SEC.

In the SEC’s complaint, Tourre is accused of structuring the CDO, called ABACUS 2007-AC1, with input from the hedge fund Paulson & Co. The CDO itself held some of the riskiest assets around, a key fact that allegedly was never stated in any marketing materials related to ABACUS or by Tourre when he sold the investments to investors. Regulators say Paulson then bet against the CDO. Again, investors in the CDO were never told about Paulson’s role or intentions.

When the housing market began to spiral out of control in 2007 and 2008, ABACUS felt the pain. In an e-mail that Tourre sent to a friend on Jan. 23, 2007, he states the following:

“More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab[rice Tourre]…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!”

Another e-mail from Tourre – this one dated Feb. 11, 2007 – reads as follows:

“The CDO biz is dead we don’t have a lot of time left.”

And neither did investors as it turns out. When the housing market collapsed, investors in ABACUS 2007 AC1 suffered losses of more than $1 billion, according to the SEC. Paulson, meanwhile, made a profit of about $1 billion. And Goldman Sachs? It was paid about $15 million for structuring the bonds and selling them to investors.

News involving Medical Capital fraud recovery has been on the minds of thousands of investors following a July 2009 lawsuit filed by the Securities and Exchange Commission (SEC) that accuses the Tustin-based company of securities fraud. In the lawsuit, the SEC alleges that Medical Capital misappropriated about $18.5 million of investor funds and misrepresented certain financial facts about the investments, otherwise known as Medical Capital Notes.

In March 2010, federal prosecutors launched a criminal investigation into two executives with ties to Medical Capital Holdings: Medical Capital CEO Sidney M. Field and President Joseph J. “Joey” Lampariello. Both Field and Lampariello were sued by the SEC in August 2009 for securities fraud.

A number of broker/dealers that sold Medical Capital investments also are facing regulatory scrutiny and lawsuits. At the top of the list is Securities America, which was sued in January 2010 by the Commonwealth of Massachusetts. According to the complaint, a number of Securities America reps allegedly misled investors about investments in Medical Capital and failed to disclose the risks associated with the investments.

The Massachusetts lawsuit further alleges that between 2003 and 2008, a group of Securities America executives repeatedly failed to heed the warning of an outside due-diligence analyst regarding the risks of the Medical Capital investments.

One Securities America rep facing legal troubles is William Glubiak, who’s been named in a $7.7 million complaint from about 24 households of investors who purchased investments in Medical Capital Holdings.

Another leading Securities America adviser involved in litigation connected to Medical Capital is Paula Dorion-Gray. In November 2009, Dorion-Gray was cited in a $254,000 complaint.

As for Securities America, it vigorously disputes the allegations of the Massachusetts Securities Division and contends that Massachusetts regulators don’t understand the workings of private placements and Regulation D offerings.

Maddox Hargett & Caruso P.C. continues to file arbitration claims with the Financial Industry Regulatory Authority (FINRA) on behalf of investors who suffered investment losses in Medical Capital. If you purchased Medical Capital Notes from a broker/dealer and wish to discuss your potential rights for recovery, contact us today.

The Securities and Exchange Commission (SEC) has charged investment firm Goldman Sachs with fraud in connection to sales of synthetic collateralized debt obligations (CDOs).

According to the SEC’s complaint, Goldman Sachs failed to disclose critical information about the CDOs to investors, including their ties to a major hedge fund whose investments Goldman allegedly was betting against. Meanwhile, as investors suffered huge financial losses totaling billions of dollars, Goldman itself profited.

The hedge fund, Abacus 2007-AC1, contained mortgage investments that were most likely to lose value, says the SEC. Abacus was then marketed and sold to investors such as pension funds, insurance companies and other hedge funds.

As reported April 16 by the New York Times, the SEC’s lawsuit against Goldman marks the first time that regulators have taken action against a Wall Street deal that helped investors capitalize on the collapse of the housing market.

“The product was new and complex, but the deception and conflicts are old and simple,” Robert Khuzami, director of the SEC’s division of enforcement, said in a statement.

“Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party,” Khuzami said.

Morgan Keegan’s legal problems show no signs of letting up. The latest troubles facing the Memphis-based investment firm include federal and state charges alleging Morgan Keegan and two employees – James Kelsoe and Thomas Weller – committed fraud when pricing several proprietary bond funds.

As reported April 12 by the Wall Street Journal, the federal and state charges are in addition to a slew of arbitration claims filed by investors who allegedly lost approximately $2 billion through fraudulent and reckless business practices on the part of Morgan Keegan. Class-action lawsuits also have been leveled against the company.

Mississippi, Alabama, Kentucky and South Carolina regulators joined the Financial Industry Regulatory Authority (FINRA) in filing fraud charges on April 7. The Securities and Exchange Commission (SEC) filed similar charges that same day.

The fraud charges are “a serious event,” said Chris Marinac, managing principal at FIG Partners, in the Wall Street Journal story. “The exposure” to eventual costs “could be all over the map,” he said. “There’s no telling what a judge and jury will do.”

Morgan Keegan may also have another legal problem on its plate. The SEC reportedly could force the company to buy back nearly $200 million in auction-rate securities – investments that became frozen when the credit markets seized up in February 2008.

Several Regions Morgan Keegan bond funds that lost more than $1 billion of investor assets have resulted in enforcement actions against Morgan Keegan & Co. and its asset management unit, Morgan Asset Management Inc., by the Securities and Exchange Commission (SEC), four states and the Financial Industry Regulatory Authority (FINRA).

Among the allegations, federal and state regulators say that Morgan Keegan mismanaged and misrepresented the funds to both investors and brokers, as well as manipulated the net asset value of the funds.

As reported April 7 by Investment News, regulators say they have evidence showing that James Kelsoe, the former portfolio manager of the Morgan Keegan funds, was allowed to work with little or no supervision.

“The actions taken by regulators today are long overdue,” said Scott Shewan, president of the Public Investors Arbitration Bar Association, in the Investment News story.

The Morgan Keegan funds in question invested in risky mortgage-backed securities. As a result, the value of the funds plummeted in 2007 and 2008 following the collapse of the housing market.

The states that joined the SEC to bring actions against Morgan Keegan include Alabama, Kentucky, Mississippi and South Carolina.

In addition to Morgan Keegan and Morgan Asset Management, regulators also are targeting Joseph Weller, head of the Morgan Keegan fund accounting department; Brian Sullivan, president and chief investment officer of Morgan Asset Management; Gary Stringer, director of investments for Morgan Keegan’s Wealth Management Services division; and Michele Wood, chief compliance officer of the Morgan Keegan funds.

The latest charges by the SEC and state regulators could serve as further evidence to help thousands of investors who have filed lawsuits and arbitration claims against Morgan Keegan with FINRA. For instance, regulators claim that the president of Morgan Asset Management, Carter Anthony, was told by Morgan Keegan president Doug Edwards and former president Allen Morgan not to supervise Kelsoe. The time period involved was from 2001 through 2006,

In an October 2009 deposition, attached to the states’ complaint, Anthony stated the following:

“Time and time again I was told by [Mr.] Morgan and [Mr.] Edwards [to] leave [Mr.] Kelsoe alone, he’s doing what we want him to do, he’s also a little bit strange, he gets mad easy, leave him alone; and I left him alone. I did what I was told to do.”

Another potentially damning piece of evidence is a May 2007 email sent by Gary Stringer, who headed Morgan Keegan’s Wealth Management Services division. That e-mail reads:

“What worries me about this [Regions Morgan Keegan Select Intermediate] bond fund is the tracking error and the potential risks associated with all that asset-backed exposure. Mr. & Mrs. Jones don’t expect that kind of risk from their bond funds. The bond exposure is not supposed to be where you take risks. I’d bet that most of the people who hold that fund have no idea what’s [sic] it’s actually invested in. I’m just as sure that most of our FAs have no idea what’s in that fund either.”