Lawyers working for the Basis Yield Alpha Fund could file a lawsuit against Goldman over the transaction -- called Timberwolf -- as early as Wednesday, said a person familiar with the situation.
Negotiations between Goldman and Basis began months ago, but have heated up in the wake of a lawsuit filed by the Securities and Exchange Commission against Goldman over another subprime mortgage-linked security.
A spokesman for Goldman declined to comment.
The hedge fund purchased a $100 million slug of the Timberwolf collateralized debt obligation in June 2007 at a time when the market for mortgage-linked securities was about to crash.
The managers of the Basis fund claim Goldman's sales and trading desk misled them and the ill-timed Timberwolf purchase helped hasten the fund's demise.
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