The manager of an Australian hedge fund is suing US investment bank Goldman Sachs for more than US$1 billion over a bad product it claims made it bankrupt, a lawyer said yesterday.
Basis Capital’s Yield Alpha Fund went bust after losing US$56 million in two weeks on the “Timberwolf” collateral debt obligation (CDO), sold by Goldman Sachs dealers who knew it would fail, lawyer Eric Lewis said.
“They knew that they were shaky, they were assembled to be shaky to take some of the worst securities off of their books and put the risk on somebody else,” Lewis told Australian public radio from Washington.
“It was done at a time when Goldman’s own internal e-mails showed they had absolutely zero confidence in the CDO market and they knew it was going to fail, the only question was when,” he said.
The suit, filed on Wednesday in the US District Court’s southern New York district, is seeking to recover the US$56 million lost from US$80 million outlaid, and more than US$1 billion in punitive damages.
Lewis said Timberwolf was “immortalized” in internal e-mails, made public in congressional hearings, which called it “one shitty deal.” Timberwolf cleaned out Basis’s US$500 million Yield Alpha Fund, forcing it into bankruptcy.
Lewis said Goldman knew “the potential for disaster [was] there the moment the market turns south.”
Basis alleges Goldman not only sold the investments knowing that they were unlikely to perform, but that Goldman itself bet against the performance of those assets and began making margin calls on it within two-and-a-half weeks.
The case echoes a civil fraud suit filed against Goldman in April by the US Securities and Exchange Commission accusing the investment bank of “defrauding investors by misstating and omitting key facts” about a similar product based on subprime mortgage-backed securities.
Goldman dismissed the legal action as 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.
“Basis made its investment at market levels, levels that it deemed attractive,” a spokesman said.
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