In 2004, Paolo Pellegrini was out of a job, living in a one-bedroom apartment in Westchester County, N.Y., with little money in the bank. He soon managed to land a gig working for hedge-fund manager John Paulson.
After helping Paulson & Co. score $20 billion with a bet against housing and pocketing about $175 million for himself, Pellegrini is now an unnamed but key character in the government’s lawsuit against Goldman Sachs Group Inc., the Wall Street Journal reported Monday.
The government alleges the bank deceived investors by selling them mortgage securities that the hedge fund had a hand in creating without disclosing the hedge fund’s role in the deal or its bearish view on it. Pellegrini was Paulson’s key representative on the deal, people familiar with the matter say.
Goldman denies it did anything wrong and is fighting the civil lawsuit filed Friday by the Securities and Exchange Commission in a New York federal court. Neither the hedge fund nor Pellegrini has been accused of wrongdoing.
The following account about Pellegrini is based on interviews with people familiar with him and his role at Paulson & Co. and the government’s complaint.
Pellegrini, a stylish native of Italy, began his mostly disappointing Wall Street career in the mid-1980s. He had been a midlevel investment banker at Lazard Freres and tried a few other trading ventures. Two high-profile marriages — to Claire Goodman, daughter of legendary New York State senator Roy Goodman, and to Beth Rubin DeWoody, daughter of the late New York real-estate mogul Lewis Rudin — ended in divorce.
Then Paulson, an acquaintance, granted Pellegrini an interview in 2004. Some at the firm were reluctant to bring on Pellegrini, who lacked experience in some areas the hedge-fund did work in. Paulson hired him anyway and in his first year at the firm, Pellegrini came up with few winning ideas, he has acknowledged.
In early 2006 Paulson asked him to size up whether housing was in a bubble. After weeks of work, Pellegrini came back with historical data suggesting homes were very overpriced. He then helped Paulson figure out how to place a wager on that view. They decided to bet against subprime mortgages through insurance-like contracts that rise in value if the bond declines in value or defaults.
Paulson and Pellegrini turned to Wall Street to ask various firms to create pools of debt, known as collateralized debt obligations, backed by subprime mortgages so that the Paulson team could buy this insurance protection on them.
Pellegrini was the point man for the hedge fund in its conversations with Goldman Sachs banker Fabrice Tourre regarding the CDO deal at issue in the SEC complaint. The SEC alleges that Tourre, a named defendant in the SEC case, was “principally responsible” for the deal. His lawyer did not respond to requests for comment.
Pellegrini also met with a representative of ACA Management LLC, a firm that Goldman tapped to serve as a “selection agent” for assets for the CDO. They met in Jackson Hole, Wyo., on Jan. 27, 2007, while Pellegrini was on vacation with his son, to discuss the proposed transaction.
Pellegrini, along with at least two other executives of Paulson & Co., helped select the debt underlining the CDO transaction. Some of the debt the Paulson firm chose remained in the deal, while some was removed, after talks with ACA.
In a statement Friday, Paulson & Co. said ACA “had sole authority over the selection of all collateral in the CDO.” The SEC complaint suggested the process was collaborative, with ACA, Paulson & Co. and Goldman conferring via email and in person. Attempts to reach ACA for comment over the weekend were unsuccessful.
The SEC has alleged that Goldman improperly failed to disclose to investors Paulson’s role in the selection process and its bearish view.
The agency talked with people at Paulson & Co. before bringing its case. It first contacted Paulson & Co. in early 2008 to learn more about CDO deals created by investment banks, a person familiar with the matter said.
Investigators met with Pellegrini at the SEC’s offices in downtown New York later in the year to discuss the transaction and similar deals, the person said. He was joined by Paulson attorneys in the meeting, which lasted several hours, this person says. Other members of Paulson’s staff also met with SEC investigators in late 2008.
By the time of that meeting, the SEC had zeroed in on the Goldman CDO transaction and was eager to obtain details of the deal, according to this person. Investigators had a list of various collateralized debt obligations sold by Wall Street firms that had led to heavy losses for investors, and were intent on learning more.
At the meeting, Pellegrini answered various questions from investigators and shared details of the trades, this person said; he hasn’t spoken with the SEC since the meeting in late 2008.
For Pellegrini, 53 years old, who now runs his own hedge fund after leaving Paulson just over a year ago, the trade has worked out well.
In late 2007, he took his new wife on vacation in Anguilla, an island in the West Indies. Stopping at a cash machine in the hotel lobby to withdraw some cash, she checked the balance of their checking account. On the screen was a figure that startled her: $45 million, newly deposited in their joint account. It was part of Pellegrini’s $175 million bonus that year.
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