ROYAL BANK of Scotland is considering legal action against Goldman Sachs after the Wall Street bank agreed to pay a $550 million (€425 million) penalty to settle accusations by the US regulator that it misled investors in a mortgage-backed security.
Although the penalty, unveiled on Thursday, is the biggest levied on a Wall Street bank, it amounts to only about a week’s worth of trading revenues for Goldman.
It is also below the $1 billion fraud the Securities and Exchange Commission had alleged in its complaint against Goldman in April.
Goldman, which had denied the SEC accusations, did not admit or deny the charges, but did pledge improvements to its internal practices and controls.
It said it was a “mistake” to state that the loans contained in the collateralised debt obligation (CDO), known as Abacus, had been selected by a third party without mentioning the role of Paulson Co, a hedge fund that bet against the security.
RBS was awarded $100m from the settlement, although it suffered losses of $841m due to the involvement of ABN Amro, the Dutch bank it acquired in 2007.
ABN lost out as it insured Goldman against the risk that ACA Capital Management, another investor in the Abacus CDO, was unable to meet its obligations.
IKB, the German bank which lost about $150 million from the CDO, received $150 million from the settlement.
RBS, which is 84 per cent owned by the UK taxpayer, will now consider its options, including whether to launch a civil lawsuit against Goldman. A final decision will have to be made by its board.
The SEC is still pursuing its case against Fabrice Tourre, the young trader whose e-mails about the Abacus CDO were at the centre of its complaint. Mr Tourre, who is on paid leave, is still an employee of Goldman, which is paying his legal costs.
One person close to RBS said Goldman’s settlement with the SEC was “clearly not unhelpful.”
But one US lawyer said that as a civil plaintiff, RBS could face a higher hurdle for launching a lawsuit than the SEC, because it would need to prove intentional misconduct by Goldman.
Ben Bruton, banking litigation partner at law firm Eversheds, said the case could now prompt other CDO investors to look at possible legal action. “It may prompt other investors in this market who have suffered losses, particularly on CDOs where the underlying exposure is to subprime mortgage obligations, to examine the marketing materials provided to them to assess their prospects of bringing civil claims.”
IKB said it was “carefully reviewing” the SEC’s settlement with Goldman. – Copyright The Financial Times Limited 2010
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