The Goldman Defense: ACA Capital, Not Paulson, Structured Abacus CDO

Key details are coming into focus in the SEC's civil lawsuit against Goldman Sachs (GS), which is accused of defrauding investors in connection with a 2007 collateralized debt obligation deal arranged by the investment bank.

Here's what we're learning:

• Senior Goldman personnel approved the transaction. "Roughly a dozen" upper-level executives sanctioned the CDO, dubbed Abacus, in which a pool of mortgage-backed securities allegedly chosen in part by hedge fund manager John Paulson were marketed to investors. The group was led by former Goldman mortgage chief Daniel Sparks. If true, then knowledge of Abacus within the bank clearly rose higher than Fabrice Tourre, a trader with the bank who solicited investors to join the deal and who is charged in the SEC suit. That raises questions about what other top Goldman execs knew of the deal.

• Goldman had warning the SEC was set to file suit. Despite the bank's claim that it had been "blindsided," securities regulators told the company in July 2009 that they might move ahead with litigation. In a final bid to settle the case, the agency in March notified Goldman in writing that it was set to file suit.

• Goldman denies it let John Paulson cherry-pick the securities in Abacus. In a call this morning to discuss first-quarter earnings, Goldman general counsel Greg Palm said ACA Capital, the asset management firm purportedly in charge of Abacus, had "sole responsibility" for structuring the CDO's portfolio. The SEC claims that Paulson selected most of the bonds underlying the deal.

• Goldman contends it introduced Paulson and ACA. Also during the call, Palm said the bank put the hedge fund investor and ACA in contact. That appears calculated to buttress Goldman's claim that participants in the deal were fully aware of who was involved. But it doesn't resolve whether the bank misrepresented Paulson's investment or his role in structuring the CDO.

• SEC commissioners were split over whether to bring the suit. Two of the agency's five commissioners opposed legal action against Goldman. SEC Chairman Mary Schapiro, a political independent, and Democratic commissioners Luis Aguilar and Elisse Walter voted in favor of filing suit, while Republican members Kathleen Casey and Troy Pardes voted against.

• Goldman's legal problems related to Abacus are widening. Britain's top financial regulator said today it opened an investigation into the deal. U.K. interest in the case likely relates to the Royal Bank of Scotland, which was invested in Abacus through ABN Amro, a Dutch bank it purchased in early 2007. Following the acquisition, RBS paid Goldman $841 million to exit its position in the CDO. Meanwhile, AIG (AIG) is also considering legal action against the bank over billions of dollars it lost related to CDOs.

• Proving that Goldman is guilty will be tough. Although the SEC has yet to provide details of its case, securities lawyers characterized the suit as "unusual" and said it will be difficult to prove in court. Most such cases require the agency to show that a company misrepresented a product. By contrast, the SEC must demonstrate that Goldman deliberately misled investors.

One critical point is whether the banking giant lied to ACA and other investors about whether Paulson was "long" or "short" on Abacus. And on this issue, one thing Palm said during the earnings call gives pause:

"We simply do not believe that the evidence cited by the SEC demonstrates that ACA was misled into believing that Paulson was going to be buying an equity position; and the term sheets and offering certainly did not reflect an equity tranche."

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