Goldman Is Charged With Subprime Fraud
By FAWN JOHNSON
WASHINGTON—The Securities & Exchange Commission charged
Goldman Sachs Group Inc. and one of its vice presidents for defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages.
The SEC said Goldman Sachs structured and marketed a synthetic collateralized-debt obligation, or CDO, that hinged on the performance of subprime residential mortgage-backed securities.
The CDO was structured and marketed by Goldman in early 2007 when the U.S. housing market and related securities were beginning to show signs of distress, the SEC complaint said.
According to the SEC, Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.
"Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc. ["Paulson"], with economic interests directly adverse to investors in the [CDO], played a significant role in the portfolio selection process," the complaint 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.
The SEC also named Goldman employee Fabrice Tourre in the complaint, saying she was "principally responsible" for creating the CDO.
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"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," Mr. Khuzami said.
The Goldman complaint is part of the SEC's investigation into investment banks and others that securitize complex financial products tied to the U.S. housing market as it was beginning to show signs of distress, according to Kenneth Lench, Chief of the SEC's Structured and New Products Unit.
In February, the SEC settled with
State Street Corp. on charges that the bank misled investors about its exposure to subprime mortgages. In that case, the SEC said the bank selectively disclosed information about its subprime mortgage investments to specific investors.
SEC Charges Goldman With Fraud - WSJ.com