Goldman Sachs Charged With Fraud

Carolina Kat Sat Apr 17, 2010 3:55 am

Goldman Sachs Charged With Fraud in Mortgage Scheme

Posted: 04/16/10

Tom Diemer, Editor of Politics Daily

The federal government charged Goldman Sachs, a prominent New York financial house, with fraud on Friday, accusing the firm of deceiving investors who bought mortgage bonds that select clients already knew were likely to fail.

The civil case, brought by the Securities and Exchange Commission, marks the first regulatory action taken against a Wall Street deal designed to capitalize on the collapse of the housing market, the New York Times reported.

The SEC also named Fabrice Tourre, a Goldman Sachs vice president, who helped create and sell the investment deal, which cost investors more than $1 billion when mortgages defaulted.

The financial instrument in question, called Abacus 2007-AC1, was created so the investment bank and certain clients could bet against the housing market -- thus protecting Goldman Sachs when the housing bubble burst, the Times reported in a December story.

The SEC complaint says Abacus was drawn up at the request of hedge fund manager John A. Paulson, who the Times said earned an estimated $3.7 billion in 2007 by betting on a collapse in housing. The problem started when when Goldman Sachs allowed Paulson to pick out certain bonds he wanted to bet against and package them in the $10.9 billion Abacus investment, which was sold to pension funds, foreign banks and others, unaware that the bonds they were buying would probably fail.

"The product was new and complex, but the deception and conflicts are old and simple," SEC enforcement official Robert Khuzami said. "Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in the investment portfolio, while telling other investors that the securities were selected by an independent, objective third party."

In a statement, Goldman called the S.E.C. accusations "completely unfounded in law and fact" and said the firm would "vigorously contest them and defend the firm and its reputation," the Times reported. Paulson was not named in the lawsuit.

If the SEC prevails, Goldman Sachs would be subject to substantial civil penalties.