Abacus investments was a New York-based hedge fund that gained notoriety for defrauding investors out of billions of dollars in the late 2000s. The fund was run by former Goldman Sachs trader Fabrice Tourre who structured complex mortgage-backed securities designed to fail. Abacus investments worked with John Paulson’s hedge fund to secretly bet against the very products it was selling to clients. When the housing market collapsed in 2008, Abacus profited while investors lost everything. The SEC eventually brought a civil lawsuit against Goldman Sachs and Tourre for securities fraud. The saga of Abacus investments highlighted the rampant conflicts of interest and lack of ethics on Wall Street prior to the financial crisis.
Abacus investments engineered products designed to fail
Abacus investments worked with Paulson’s hedge fund to construct complex collateralized debt obligations (CDOs) filled with risky subprime mortgages. However, they allowed Paulson to choose the underlying assets while not disclosing the fact that his fund was betting against the CDOs. Abacus would then market these products to unsuspecting investors as solid investments. In reality, they were designed to fail once the housing bubble burst. By hiding Paulson’s involvement and true interests, Abacus investments was able to defraud customers for its own profit.
The SEC charged Abacus and Goldman Sachs with securities fraud
When the housing market collapsed in 2008, the Abacus CDOs failed and investors lost billions. It soon came to light that Abacus never disclosed Paulson’s involvement and the fact that the CDOs were designed to fail. In 2010, the SEC brought a major civil lawsuit against Goldman Sachs and Fabrice Tourre for securities fraud related to Abacus investments. The SEC accused them of misleading investors by failing to disclose the truth about Paulson’s short position. Tourre was found liable in 2013 while Goldman paid a $550 million settlement.
The Abacus case highlighted unethical practices on Wall Street
The Abacus investments saga was deeply troubling for Wall Street as it illustrated the rampant conflicts of interest and lack of ethics amongst big banks and funds during the housing bubble. Firms like Abacus would create products designed to fail and sell them to unsuspecting customers, all while profiting from secret bets against them. Rather than manage risk properly, many funds engaged in fraud and deception to make quick profits. The Abacus case was an indictment of the corrupt Wall Street culture that contributed to the 2008 financial crisis.
Abacus investments defrauded investors by marketing products designed to fail while profiting from bets against them. Its actions contributed to billions in losses during the financial crisis.