MANHATTAN (CN) - Goldman Sachs defrauded investors of billions of dollars by persuading them to continue buying Student Loan Auction Rates Securities and dissuading them from cashing them in "when Goldman knew the market for those securities was collapsing," Ocwen Financial Corp. claims in Federal Court.
Ocwen says Goldman reaped "substantial fees" from managing the deceptive and propped-up SLARS auctions and brokering them. Ocwen claims Goldman Sachs defrauded it of hundreds of millions of dollars.
Ocwen owns 46% of co-plaintiff Bankruptcy Management Solutions. It says that by August 2007, Goldman Sachs knew the market for SLARS had evaporated. So Goldman Sachs began buying the SLARS for its own account, to create and maintain the illusion that the market still existed, Ocwen says.
"Although this scheme effectively concealed from investors such as BMS and Ocwen the loss of genuine liquidity in the SLARS market, it threatened to overwhelm Goldman's and other brokers' balance sheets with increasingly illiquid and unmarketable securities," the complaint states.
"As Goldman and other brokers scrambled to prop up the collapsing SLARS market, they also employed a number of tactics to off-load their holdings of those unwanted securities that threatened to overwhelm their balance sheets. Among those tactics, brokers artificially inflated the interest rates that issuers of SLARS paid to holders of those securities in the hopes of inducing more third-party investors to purchase the instruments. Goldman and other brokers artificially inflated interest rates by deliberately submitting high bids at auctions to buy SLARS for their own accounts, which had the effect of driving up interest rates the issuers would pay on all SLARS that sold at such auctions."
Goldman concealed from investors that an Aug. 2, 2007 auction of auction rate securities and collateralized debt obligations failed to sell $9 billion in paper, leaving institutional and corporate investors stuck with the now-useless notes, the complaint states.
By September 2007, "Goldman had brokered a combined $3.3 billion in SLARS transactions for BMS and Ocwen," the complaint states. Ocwen and BMS held $396 million in SLARS then, the complaint states, without mentioning what became of the other $2.9 billion. The plaintiffs say that "in reliance on Goldman's representations and concealments, Ocwen purchased, for itself and BMS, an additional $1.5 billion of SLARS from Goldman."
Plaintiffs say "tens of thousands of investors" were left stranded with $330 billion in illiquid, long-term securities, "including more than $236 million of SLARS Goldman had sold to BMS and Ocwen based on its deliberate misrepresentations." Again, the complaint does not reconcile the $1.5 billion and $236 million figures.
Plaintiffs demand punitive damages for fraud. They are represented by Eric Wallach with Kasowitz, Benson, Torres.