Defunct Hedge Fund Basis Yield Alpha Fund (Master) Sues Goldman Sachs for Securities Fraud Arising Out of the Fund’s Investment in Goldman’s Timberwolf CDO

Hedge fund Basis Yield Alpha Fund (Master) (Fund) has commenced a civil securities fraud suit against Goldman Sachs (Goldman) in the Southern District of New York.  In March 2007, Goldman created a collateralized debt obligation (CDO) known as Timberwolf 2007-1, which was allegedly part of Goldman’s efforts to reduce its exposure to the subprime mortgage market.  The Fund agreed to purchase $100 million face value of interests in Timberwolf for about $80.8 million.  Within months of the purchase, Timberwolf had declined in value by more than 80 percent, resulting in the Fund’s collapse and subsequent liquidation.  The Fund alleges that, in selling Timberwolf interests to the Fund, Goldman failed to tell the Fund that it considered Timberwolf to be a bad deal, that Goldman expected the value of CDO’s based on the subprime mortgage market to decline in value, and that Goldman was short selling both the stock of companies involved in the subprime business and the underlying CDO’s owned by Timberwolf.  Despite that, the Fund alleges that Goldman assured the Fund that the price for the Timberwolf interest was “a good entry price” and that the subprime market had stabilized.  We summarize the allegations made by the Fund.

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