Merrill Lynch & Co. engaged in the same investor fraud that the U.S. Securities and Exchange Commission accused Goldman Sachs Group Inc. of committing, according to a bank that sued the firm in New York last year.No Surprise
Cooperatieve Centrale Raiffeisen-Boerenleenbank BA, known as Rabobank, claims Merrill, now a unit of Bank of America Corp., failed to tell it a key fact in advising on a synthetic collateralized debt obligation. Omitted was Merrill�s relationship with another client betting against the investment, which resulted in a loss of $45 million, Rabobank claims.
�This is the tip of the iceberg in regard to Goldman Sachs and certain other banks who were stacking the deck against CDO investors,� said Jon Pickhardt, an attorney with Quinn Emanuel Urquhart Oliver & Hedges, who is representing Netherlands-based Rabobank.
Goldman Sachs, the most profitable securities firm in Wall Street history, created and sold CDOs tied to subprime mortgages in early 2007, as the U.S. housing market faltered, without disclosing that Paulson helped pick the underlying securities and bet against them, the SEC said in a statement yesterday.
The SEC allegations are �unfounded in law and fact, and we will vigorously contest them,� Goldman said in a statement.
�When one major firm becomes aware of the creative instrument of others, there is historically an effort to replicate them,� said Jacob Frenkel, a former SEC lawyer now in private practice in Potomac, Maryland.
SEC spokesman John Heine declined to comment on whether it is investigating Merrill�s actions.
Merrill loaded the Norma CDO with bad assets, Rabobank claims. Rabobank seeks $45 million in damages, according to a complaint filed in state court in June 2009. Rabobank initially provided a secured loan of almost $60 million to Merrill, according to its complaint.
That Merrill Lynch now stands accused should not surprise anyone. Nor will it be any surprise if Morgan Stanley and Citigroup are accused of similar dealings. Indeed, it may be interesting to see who is not accused.
Goldman's statement The SEC allegations are �unfounded in law and fact, and we will vigorously contest them� is an interesting theoretical debate.
Accusations that Goldman front runs trades, bets against clients, is unethical to the nth degree, and has no sense of fiduciary responsibility to its clients is quite easy to believe. Whether Goldman Sachs violated the law is another question.
Even if the Goldman settles with the SEC for peanuts, numerous cases will likely make it to court. This may drag out for years.
By the way, anyone buying those CDOs from Merrill or Goldman has mush for brains, but that will not likely be a valid legal defense.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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