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Sachs retained a significant residual long risk position in the transaction.” Goldman’s responses did little to stem the carnage the SEC’s complaint caused in the trading of Goldman’s stock, which lost $12.4 billion in market value that day.
    The SEC’s case against Goldman was no slam dunk. For instance, ACA was no innocent victim but rather had transformed itself in 2004 from an insurer of municipal bonds to a big investor in risky CDOs after getting a $115 million equity infusion from a Bear Stearns private-equity fund, which became ACA’s largest investor. Furthermore, documents show that Paolo Pellegrini, John Paulson’s partner, and Laura Schwartz, a managing director at ACA, had meetings together—including on January 27, 2007, at the bar at a ski resort in Jackson Hole, Wyoming—where the main topic of conversation was the composition of the reference portfolio that went into ABACUS. Reportedly, in his deposition with the SEC, Pellegrini stated explicitly that he informed ACA of Paulson’s intention to short the ABACUS deal and was not an equity investor in it. (Pellegrini did not respond to a request to comment and his deposition is not available to the public.) Other documents show Paulson and ACA together agreeing on which securities to include in ABACUS and seem to call into question the SEC’s contention that ACA was misled.
    Another e-mail, sent by Jörg Zimmerman, a vice president at IKB, on March 12, 2007, to a Goldman banker in London who was working with Fabrice Tourre on ABACUS, revealed that IKB, too, had some say in what securities ABACUS referenced. “[D]id you hear something on my request to remove Fremont and New Cen[tury] serviced bonds?” Zimmerman asked, referring to two mortgage origination companies then having severe financial difficulties (and which would both later file for bankruptcy) and that Zimmerman wanted removed from the ABACUS portfolio. “I would like to try to [go to] the [IKB] advisory com[m]i[t]tee this week and would need consent on it.” The final ABACUS deal did notcontain any mortgages originated by Fremont or New Century. (Zimmerman did not respond to an e-mail request for comment.) A former IKB credit officer, James Fairrie, told the
Financial Times
that the pressure from higher-ups to buy CDOs from Wall Street was intense. “If I delayed things more than 24 hours, someone else would have bought the deal,” he said. Another CDO investor told the paper, though, that IKB was known to be a patsy. “IKB had an army of PhD types to look at CDO deals and analy[z]e them,” he said. “But Wall Street knew that they didn’t get it. When you saw them turn up at conferences there was always a pack of bankers following them.”
    The judge in
SEC v. Goldman Sachs
gave Goldman an extension until July 19 to file its response to the SEC complaint. On July 14, five days early, and as expected, Goldman settled the SEC’s case—without, of course, admitting or denying guilt—and agreed to pay a record fine of $550 million, representing a disgorgement of the $15 million fee it made on the ABACUS deal and a civil penalty of another $535 million. About as close as Goldman got to admitting any responsibility for its behavior was to state that it “acknowledges that the marketing materials for the ABACUS 2007-AC1 transaction contained incomplete information. In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was ‘selected by’ ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson’s economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure.” The firm also agreed to change a number of its regulatory, risk assessment, and legal procedures to make sure nothing like the disclosure snafus in the ABACUS deal happens again.
    Despite the settlement of the SEC’s case against