SEC charges Goldman Sachs

SEC charges Goldman Sachs with fraud

By Colin Barr, senior writer

(Fortune) — The Securities and Exchange Commission on Friday charged Wall Street’s most gilded firm, Goldman Sachs, with defrauding investors in a sale of securities tied to subprime mortgages.

The SEC said it charged New York-based Goldman (GS, Fortune 500) and a vice president, Fabrice Tourre, for their failure to disclose conflicts in a 2007 sale of a so-called collateralized debt obligation. Investors in the CDO ultimately lost $1 billion, the SEC said.

Hedge fund manger John Paulson.

The SEC’s civil fraud complaint alleges that Goldman allowed hedge fund Paulson & Co. — run by John Paulson, who made billions of dollars betting on the subprime collapse — to help select securities in the CDO.

Goldman didn’t tell investors that Paulson was shorting the CDO, or betting its value would fall. When the CDO’s value plunged within months of its issuance, Paulson walked off with $1 billion, the SEC said.

“The product was new and complex but the deception and conflicts are old and simple,” said Robert Khuzami, director of the Division of Enforcement for the SEC.

Goldman said Friday morning that “the SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation.”

After the market closed, the firm added that it is “disappointed that the SEC would bring this action related to a single transaction in the face of an extensive record which establishes that the accusations are unfounded in law and fact.”

Goldman said it lost $90 million on the deal. The firm added that it never told the portfolio arranger, ACA Capital Management, that Paulson’s fund was going to purchase an equity interest in the CDO, as the SEC alleged.

Goldman shares tumbled 13% following the midmorning announcement, wiping out $12 billion of shareholder value. Shares of Deutsche Bank (DB), another big player in the structured securities markets of the bubble era, slid 8%.

The shares of JPMorgan Chase (JPM, Fortune 500), Citigroup (C, Fortune 500), Morgan Stanley (MS, Fortune 500) and other big banks declined between 3% and 5%, as investors all over Wall Street heard the footsteps of an apparently revitalized federal law enforcement apparatus.

“This litigation exposes the cynical, savage culture of Wall Street that allows a dealer to commit fraud on one customer to benefit another,” Chris Whalen, a bank analyst at Institutional Risk Analytics, said in a note to clients Friday.

Posted by Ovi on April 17, 2010 - 11:51 am . Filed under Financial & Money, US, Wall Street. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry