John Paulson Hedge Fund Trading - Sub Prime and Goldman Sachs

John Paulson is known as the man that made billions from shorting sub prime mortages. His name was all over the SEC Goldman Subprime fraud case. However Paulson was not charged in Goldman Sachs fraud. Earlier in 2010 the U.S. Securities & Exchange Commission charged Goldman Sachs and a Goldman Sachs employee with fraud. Slso named in the allegations  was hedge fund Paulson & Co. There were many queries on message boards asking why the complaint did not name Paulson.

The question as to why Paulson was not charged was answered by the SEC’s head of enforcement, Robert Khuzami. Khuzami took part in a panel at the 22nd annual Corporate Law Institute sponsored by Tulane University Law School in New Orleans less than an hour after the SEC announced the Goldman complaint. He was there to talk about strengthening the SEC’s enforcement division. The Goldman billion dollar fraud charges were some cue!

Khuzami said “Goldman was responsible for the representation to the investors, and Paulson was not,’’ That is to say there was no evidence that Paulson & Co. made any representations to ACA Capital Holdings about the collateral in the Abacus 2007-AC1 collateralized debt obligation.

"Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc. ["Paulson"], with economic interests directly adverse to investors in the [CDO], played a significant role in the portfolio selection process," the complaint said.

In the SEC complaint Paulson affectively took the other side of the Abacus CDO that is they shorted it and made one billion dollars from the trade. It is alleged ACA lost one billion dollars.

Khuzami told Deal Journal that the Goldman Sachs charges are part of the SEC’s broader effort “to look at products that were implicated in the financial crisis across the board.” There has been much speculation that the charges are politically motivated to force the passage of a financial regulations bill.

With regard to why Fabrice Tourre was the only Goldman Sachs employee Khuzami said, “We brought a case that was appropriate based on the law and the facts.” This did nothing to lessen the politically motivated speculation given no one higher up on the Goldman food chain was cited.

CNBC reported a former fund manager for Paulson named Paolo Pellegrini was the informant or snitch for the SEC in the case. This suggests the SEC may not have full knowledge of Paulson's individual actions in Abacus 2007-AC1. It is worth noting that Paulson's early trades against the subprime bubble were losers.

These trades started going on in 2005 according to a 2008 Wall Street Journal story and his trades were based on research that mortgages were overvalued by the market and would fall in value. How right he was, the question will be did he have an unfair advantage or even manipulate the bubble to pop with the ABACUS ABS CDO program.

Paulson & Co. issued a response stating that:

"While Paulson purchased credit protection from Goldman Sachs on securities issued under the ABACUS ABS CDO program, we were not involved in the marketing of any ABACUS products to any third parties. ACA as collateral manager had sole authority over the selection of all collateral in the CDO, securities of which were subsequently rated AAA by both S&P and Moody's. Paulson did not sponsor or initiate Goldman's ABACUS program, which involved at least 20 transactions other than that described in the SEC's complaint."

Why Paulson was not Charged in the Goldman Sachs Fraud seems answeredf or now. This case will continue to develop and unravel in the days ahead one would suspect, stay tuned.