Goldman Sachs was yesterday slapped with a $1 billion law suit by an Australian hedge fund, accusing the US investment banking and securities firm of misleading it while buying the now infamous collateralised debt obligation (CDO) Timberwolf-2007.
The suit filed yesterday in the federal court in New York, comes after months of negotiations for a settlement broke down between Goldman Sachs and the Sydney-based hedge fund company Basis Capital.
Managers of Basis Capital's Yield Alpha Fund, claim in the lawsuit that Goldman Sachs sold them the highly rated Timberwolf-2007 CDO despite knowing that it was junk since Goldman's own internal emails marked the CDO as 'high risk'.
Yield Alpha Fund bought two CDOs of AA-rated securities at a price of approximately $38.6 million and AAA-rated securities at a price of approximately $42.1 million from Goldman.
Not only had Goldman sold the CDOs to the Auastralian hedge fund, but also financed it to the purchase them and within weeks, started calling in for margin money.
With two weeks of Yield Alpha Fund purchasing the CDO's, the securities declined in value, leading to five margin calls over a two-week period, said Basis Capital in its suit.