UPDATE: Europe Banks Mull Lawsuits Against Goldman - Sources

16th Jul 2010 12:57

(Adds IKB detail.) By Jessica Hodgson and Madeleine Nissen Of DOW JONES NEWSWIRES LONDON (Dow Jones)--Goldman Sachs Group Inc. (GS) is facing possible lawsuits from two European banks over its role in marketing the controversial mortgage-backed debt security which prompted a Securities & Exchange Commission fraud suit, people familiar with the matter said Friday. The U.K.'s Royal Bank of Scotland PLC (RBS) and IKB Industrie Bank of Germany (IKB.XE) are separately considering launching civil suits against Goldman to recoup losses sustained through their investments in the derivative package during the financial crisis. Goldman Sachs Thursday settled civil charges with the SEC on the marketing of the security: a so-called synthetic collateralized debt obligation, or package of mortgage-backed derivatives, called Abacus 2007-ACI. Goldman has agreed to pay $550 million to settle civil charges that it duped clients by selling the security without disclosing the role of Paulson & Co., a hedge fund, in the transaction and specifically the fact that Paulson was effectively betting that the mortgages in the security would fail. Of the $550 million, approximately $100 million will be paid to RBS, with another $150 million going to IKB. Paulson, which helped design the Abacus debt securities package, wasn't accused of wrongdoing by the SEC. RBS, which was a major investor in the security, lost $841 million as a result of the deal. "RBS has been monitoring the complaint closely," the bank said in a statement. "Following the SEC's announcement, RBS will now carefully consider all of its options." A person familiar with the situation said that a civil suit was one of a range of options being examined by RBS to try to recoup more of the losses from the transaction. A person familiar with IKB said the bank is considering legal action, though it hadn't decided how to proceed. "IKB is carefully examining further claims - knowing how difficult it is to nail Goldman Sachs down to facts," a person familiar with the matter said. The person said that the Abacus transaction hinged on some email evidence which helped prove the misconduct of Goldman Sachs, but in other cases it would be more difficult to prove alleged misconduct. The Goldman complaint resonated with European banks because the transaction led to major write-downs at RBS and IKB. Goldman, as part of its settlement, admitted that the marketing materials for the Abacus transaction "contained incomplete information." In particular, it admitted that it was "a mistake" not to disclose the role of Paulson & Co. in the process of selecting the portfolio, and the fact that Paulson's economic interests were "adverse" to the investors who had positions in the debt securities package. Both RBS and IKB have strong incentives to pursue Goldman for losses sustained through the transaction as both banks received state aid during the financial crisis. In the case of RBS an acquisition spree, which included the takeover of ABN Amro, combined with heavy exposure to derivatives products which went sour, brought the bank near to collapse. The U.K. government still has a holding of over 80% in RBS after a GBP20 billion bailout package was issued in 2008. IKB, which is now owned by U.S. private equity firm Lone Star Funds, was bailed out by the German government and other German banks to the tune of about EUR10 billion. A spokesman for KfW Bankengruppe, IKB's former majority owner, said Friday it was looking at the SEC's decision. -By Jessica Hodgson; Dow Jones Newswires; +44207 8429373; [email protected]. (Susanne Craig and Kara Scannell contributed to this report.) (END) Dow Jones Newswires July 16, 2010 07:57 ET (11:57 GMT)