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Legal Conundrum: AIG Insurance Covers Goldman Sachs Executives

Posted on Apr 22, 2010 by Sergio Ulloa ()  | Tags: CDO, Directors and Officers Liability Cover, Goldman Sachs, SEC

Directors and Officers of embattled Goldman Sachs Group Inc. (GSG) have liability cover provided by American International Group Inc. (AIG). AIG in turn is considering suing Goldman's for the roughly US$2 billion (EUR 1.47 billion) in losses incurred whilst holding guarantees to Collateralised Debt Obligations (CDOs) issued by GSG. The Securities and Exchange Commission (SEC) has charged GSG with making mis-statements and omissions in relation to a synthetic CDO, and is suing the New York-based group for fraud in connection with the structuring and marketing of the mortgage-related debt security. The focus of the SEC civil lawsuit against GSG is centred around a CDO that was tied to the performance of sub-prime residential mortgage-backed securities. The said CDO was structured and marketed in early 2007, when the securities tied to the US housing market were starting to show signs of distress. According to the SEC, GSG was served with a Wells notice in 2009. The reception of the Wells notice, which is a letter issued by the SEC informing its intentions to begin enforcement proceedings against the recipient, should have been disclosed by GSG to investors. According to GSG the SEC lawsuit is "completely unfounded". AIG had insured some CDO transactions carried out by GSG, although these are not the ones cited in the SEC complaint. AIG is considering launching legal proceedings against GSG over losses incurred on US$6 billion (EUR 4.4 billion) of insurance deals on mortgage-backed securities. Depending upon the results of the SEC civil lawsuit, and provided GSG is found guilty in regards to the disclosure issues, the transactions of AIG and other companies would be scrutinised for similarities with the ruling and then cited to the SEC. A private lawsuit is likely to be filed in the event that irregularities are found, according to sources well-versed with the current situation. Companies mentioned: AIG AIG LogoAmerican International Group Inc. (AIG), a world leader in insurance and financial services, is the leading international insurance organization with operations in more than 130 countries and jurisdictions. AIG companies serve commercial, institutional and individual customers through the most extensive worldwide property-casualty and life insurance networks of any insurer. In addition, AIG companies are leading providers of retirement services, financial services and asset management around the world. AIG's common stock is listed on the New York Stock Exchange, as well as the stock exchanges in Paris and Tokyo. GSG Goldman Sachs Group Inc. (GSG) is a global investment banking and securities firm which engages in investment banking, securities services, investment management and other financial services primarily with institutional clients. Goldman Sachs was founded in 1869, and has offices in all major international financial centres, and provides mergers and acquisitions advice, underwriting services, asset management, and securities services to its clients, which include corporations, governments and high net worth individuals around the world. The firm also engages in proprietary trading and private equity deals. It is a primary dealer in the United States Treasury security market.
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