Economic Indicators, Stock Market & Investment Reports

4.16.2010

SEC charges Goldman Sachs defrauded investors

The Securities and Exchange Commission (SEC) filed a case to sue Goldman Sachs and one of its employees for civil fraud, alleging they defrauded investors in selling a financial product tied to subprime mortgages, in 2007.

The SEC's allegation focuses on a mortgage securities transaction structured by Goldman, for which it allegedly earned $15 million in fees. Goldman allegedly helped hedge fund Paulson & Co., led by John Paulson, bet against those securities, and Paulson's firm made a profit of about $1 billion. Investors in the mortgage securities lost more than $1 billion, the SEC said.

The instrument in the S.E.C. case, called Abacus 2007-AC1, was one of 25 deals that Goldman created so the bank and select clients could bet against the housing market.


The accusation alleges that Goldman sold a synthetic collateralized debt obligation (Synthetic CDO), to investors. Goldman told those investors that subprime-mortgage securities underlying the CDO were selected by a third-party firm called ACA. However, it was the Paulson fund that had selected the securities.

Paulson, in a separate transaction then put up lots of money to bet that those securities would sour. Investors who purchased slices of the CDO collectively lost $1 billion as the mortgage-backed securities quickly soured amid the mortgage crisis.

The SEC alleges, Goldman misled investors by failing to disclose that Paulson & Co. also played a role in selecting the mortgages and stood to profit from their decline in value.

The SEC claims that Goldman Sachs Vice President Fabrice Tourre was principally responsible for structuring the deal. Tourre, an executive director in London of Goldman Sachs International, was a vice president at the company's New York headquarters at the time of the activities in early 2007, the SEC said.

The SEC is seeking unspecified fines and restitution from Goldman Sachs and Tourre.

Defaults on the mortgages and the unraveling of related derivatives and debt played a big role in the credit crunch that led to a Wall Street meltdown and the worst U.S. recession since the 1930s.

Wall Street slid on Friday, led by bank shares, after Goldman Sachs was charged with the fraud.

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