Goldman Sachs in court over legacy CDO

Astra Asset Management is suing Goldman Sachs over allegations that the bank engaged in misconduct toward investors, including Astra, regarding the collateral securities that secured the notes issued by Abacus 2006-10, a synthetic CDO. Astra alleges that Goldman made US$70m in gains through breaking the established eligibility criteria on the CDO, as far back as 2006.

Astra Asset Management is being represented by Kasowitz Benson Torres and Uri Itkin, partner at the firm, comments: “Goldman Sachs exposed investors to riskier securities than permitted by the contract. If investors had known that Goldman Sachs had no intention of following the contract, then the transaction would not have closed, and certainly would not have closed on the existing terms.”

Astra asserts that Abacus 2006-10 did not comply with contractual eligibility criteria, allowing Goldman to conceal its violations and continue to collect protection payments from investors. Unclear criteria surrounding the eligibility of securities, allegedly allowed Goldman Sachs to take an aggressive reading of the agreements, leading to the dispute. 

A preliminary hearing was held on 24 September with the trial set to start mid-2019. Both Astra and Goldman Sachs have appeared in Minnesota state court and submitted position statements.

Astra asserts that putting an ineligible security in place of an eligible one exposed it to risk it had not been compensated for. Goldman Sachs denies any violations and that lack of compensation does not equate to damages.

The bank immediately purchased the remaining collateral securities after the dispute was filed, suggesting that it was aware the supplemental collateral securities did not meet eligibility criteria. Because of the difficulty in examining other synthetic CDOs, it is unclear whether Goldman Sachs is the only bank operating in this manner or if this type of conduct is more widespread.

Astra, along with another investor affiliated with Deutsche Bank, had previously raised its concerns with Goldman Sachs. However, the bank refused to provide any data concerning the violations and informed Astra that it would cease all trading activities until resolving the matter.

TB