Report: ACA Picked Risky Mortgages at Center of Goldman Fraud Case

The SEC fraud case against Goldman Sachs was dealt another potential blow Thursday, as CNBC reported that ACA Management LLC, one of the parties Goldman allegedly misled, actually selected some of the riskiest assets in the complex deal at the heart of the case.

A quick review of the facts:

In 2007, Goldman undertook to create a complex mortgage-backed security for one of its hedge fund clients, Paulson & Co. Paulson wanted to bet against the mortgages in the portfolio on the assumption that the subprime market would collapse, which it did, meaning billions in profits for the fund.

Goldman tapped ACA as a third party to select the mortgage assets that would be included in the security, know as a collateralized debt obligation. Paulson also made recommendations to ACA on which mortgages to include in the portfolio.

The SEC case hinges on two key allegations: that Goldman misled ACA by not disclosing Paulson's intention to bet against the portfolio and that Goldman deceived other investors by not disclosing Paulson's role in selecting the mortgages in the security.

However, according to CNBC's review of documents, ACA was actually responsible for selecting some of the mortgages that brought the portfolio's value down.

According to the report, ACA threw out 68 of the 123 securities Paulson recommended because they had higher delinquency rates than the others. But ACA also selected 14 securities with lower credit ratings than the overall portfolio. The firm also included securities with high percentages of mortgages from California and interest-only loans, both of which had a higher chance of failing.

But ACA's decisions weren't aimed at helping Paulson. On the contrary, ACA was betting the portfolio's value would increase (as evidenced by the firm assuming 85 percent of the deal's risk and its subsequent collapse after the subprime mortgage bubble burst).

According to the report, ACA's selections represented "conventional thinking" about the mortgage market, while Paulson was ahead of the curve.

If CNBC's analysis is accurate, the SEC's charge that Paulson was responsible for loading the CDO with assets that were doomed to fail takes a hit. On top of that, a former Paulson executive said Wednesday the hedge fund had indeed notified ACA of its intention to bet against the portfolio.

All of this bolsters Goldman's likely defense - that those involved in the deal were sophisticated investors who should have done their homework and known better.

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