Basis Capital's $1bn Goldman claim

Investment bank Goldman Sachs is being sued for more than $1 billion by an Australian hedge fund that has accused the bank of fraud by selling it "shitty" complex US mortgage products that led to its collapse.

Basis Capital has claimed in a New York court filing that Goldman Sachs engaged in "securities fraud and common law fraud" in 2007 when it sold the Basis Yield Alpha Fund (Master) a range of collateralised debt obligations, named Timberwolf.

Former Goldman mortgage executive Tom Montag is claimed to have described Timberwolf as "one shitty deal" in the same week Basis and Goldman were finalising their deal.

It is alleged that Goldman and its affiliated companies made "materially misleading statements and omissions" in relation to the June 2007 purchase of $38.6 million of AA-rated securities and $42.1m of AAA-rated securities.

Sydne-based Goldman executive George Maltezos is said to have emailed cashflow projections from Goldman's New York office to Basis between April and June 2007, according to the court documents, but the bank failed to include key information, rendering the cashflows "misleading and deceptive".

Basis began receiving margin calls just two weeks after buying the Timberwolf securities, and within a month the products had dropped in value by more than $30m. Basis says it was then forced into liquidation in August 2007.

The case is the second recent claim of major fraud brought against Goldman.

In April, it was accused by the US Securities and Exchange Commission of a $US1 billion investor fraud in collusion with a hedge fund in 2007.

It was claimed Goldman deceived its clients by selling mortgage securities secretly designed by a John Paulson hedge fund which, at the same time, was shorting the US property market.

The Basis and the SEC claims against Goldman coincide with one of the largest legal and regulatory clashes seen on Wall Street.

In a statement, Goldman said it believed the Basis case was "without merit" and emphasised it had lost "several hundred million" dollars on its holdings during the Timberwolf transactions.

"The lawsuit is a misguided attempt by Basis, a hedge fund that was one of the world's most experienced CDO investors, to shift its investment losses to Goldman Sachs," a spokesperson said.

"Basis made its investment at market levels -- levels that it deemed attractive. These levels were substantially below the face value of the securities and consistent with where other investors were purchasing the same Timberwolf securities during the same time period.

"Basis is now trying to recoup its losses based on false allegations that it was misled about aspects of the transaction and market conditions."

The local operations of Goldman Sachs JBWere in Australia are named as a defendant in the suit, which is making global headlines. Mr Maltezos is named as the local link between Goldman's Australian and New York offices.

Basis says it lost at least $56m but says it should receive "in excess of $1 billion" in damages "to punish and deter Goldman with respect to its pervasive fraudulent practices".

The Basis Yield Alpha Fund (Master) was worth $1.5bn, meaning the Timberwolf investment was a minor component of the overall fund's value.

It is alleged that Goldman used the Timberwolf product as a key part of its strategy to earn fees while also "claiming out left over positions".

"That is, dumping its inventory of toxic securities on customers while simultaneously providing a vehicle for Goldman to profit from the decline in value of such securities," the complaint says.

Among the allegations levelled at Goldman are that it said that the assets that made up Timberwolf were picked by an independent third party, when in reality Goldman "exercised substantial influence and control over every asset to be included in Timberwolf".

A string of emails and conversations, referred to in the court documents, show the hedge fund seeking emergency briefings with Goldman executives over the investment.

The move to sue Goldman Sachs in the US comes just days after the Grand Court in the Cayman Islands approved a change in control of the Master Fund from liquidators Grant Thornton to the fund's major shareholder, the Basis Yield Alpha Fund.

The directors of this fund are Australian-based Peter Dobson and Japan-based Tom Carrick. Neither wished to comment yesterday.

Goldman Sachs executives in Australia were surprised at the emergence of the Basis lawsuit. It is understood that negotiations on the possibility of a settlement had been under way for some months.

A senior investment banking figure noted that it had fallen to a small Australian outfit to blow the whistle on the bank and launch the first legal action.

"I think it will be interesting to watch and see whether this creates a wave of similar actions," he said.

(Published by The Australian – June 10, 2010)

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