April 16, 2010
The Securities and Exchange Commission filed fraud charges Friday against Goldman Sachs, one of the most successful but vilified banks on Wall Street, for allegedly selling investors a financial product based on subprime mortgages that was secretly designed to lose value.
In filing the civil suit against Goldman Sachs, the agency is targeting one of the banks that largely escaped the wreckage of the financial crisis, and with the help of taxpayer bailouts, emerged stronger.
The SEC's suit strikes at a practice that was one of the main causes of the financial crisis: the creation of poisonous investments derived from home loans made to borrowers who couldn't afford the houses they were buying.
The suit also drags into a legal maelstrom Paulson & Co., the firm of legendary hedge fund manager John Paulson, who made billions of dollars by betting against the housing market in the years before it went bust. He and his firm have not been accused of wrongdoing.
Goldman Sachs denied the allegations. "The SEC's charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation," the bank said in a statement.
Paulson & Co. also had no immediate comment.
In this case, the SEC alleges that Goldman Sachs created and marketed a financial product known as a collateralized debt obligation, often referred to as a CDO, whose value was linked to that of home loans. The SEC says the bank failed to tell investors important information about the investment -- in particular that Paulson & Co. played a central role in helping Goldman assemble the CDO while the hedge fund at the same time placed bets that the CDO would lose value.
"The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, director of the Division of Enforcement. "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."