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April 17, 2010
SEC Charges Goldman Sachs With Fraud
    by Robert Kropp

Commission alleges that investment banker and one of its vice presidents defrauded investors with financial product based on subprime mortgages.


The Securities and Exchange Commission (SEC) has charged Goldman Sachs and one of its vice presidents with defrauding investors about a financial product tied to subprime mortgages. According to the SEC complaint, filed in the US District Court for the Southern District of New York on Friday, Goldman Sachs and one of its vice presidents, Fabrice Tourre, made "materially misleading statements and omissions in connection with a synthetic collateralized debt obligation (CDO) GS&Co structured and marketed to investors."

The SEC alleged that Paulson & Co., one of the world's largest hedge funds, paid Goldman Sachs to structure a transaction by which Paulson & Co. could choose and then bet against mortgage securities in the expectation that the securities would lose value.

In February 2007 John Paulson, the manager of the hedge fund, requested that Goldman Sachs create an investment vehicle called ABACUS 2007-AC1, whose component mortgage bonds were chosen by Paulson because he believed rheir credit ratings were too high and they were likely to lose money.

Paulson, who was not charged in the SEC complaint, reportedly earned almost $4 billion in 2007 by betting that the housing bubble would burst.

Robert Khuzami, Director of the SEC Division of Enforcement, said, "Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party."

The complaint alleges that Goldman Sachs then sold the ABACUS 2007-AC1 to investors without informing them of Paulson's role in the creation of the product. According to the SEC, "By Oct. 24, 2007, 83 percent of the RMBS in the ABACUS portfolio had been downgraded and 17 percent were on negative watch. By Jan. 29, 2008, 99 percent of the portfolio had been downgraded."

"Investors in the liabilities of ABACUS are alleged to have lost more than $1 billion," the Commission continued.

Following Friday morning's announcement of the complaint, shares of Goldman Sachs lost 13% of their value by closing, resulting in a loss of more than $10 billion in value.

 

 
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