MANHATTAN (CN) – The SEC this morning (Friday) charged Goldman Sachs and its vice president Fabrice Tourre with defrauding investors by misstating and omitting key facts about a collateralized debt obligation tied to subprime mortgages as the U.S. housing market began to collapse. Investors lost more than $1 billion in the deal, the agency said.
In its federal complaint, the SEC said Goldman Sachs failed to disclose “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.”
“The product was new and complex but the deception and conflicts are old and simple,” SEC enforcement director Robert Khuzami said in a statement. “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 SEC claims that one of the world’s largest hedge funds, Paulson & Co., paid Goldman Sachs to structure a transaction in which Paulson & Co. could take short positions against mortgage securities chosen by Paulson & Co., based on a belief that the securities would experience “credit events.”
Paulson paid Goldman Sachs $15 million for structuring and marketing the ABACUS portfolio; the deal closed on April 26, 2007 and by Jan. 29, 2008, 99 percent of the portfolio had been “downgraded,” the SEC said.
Investors are believed to have lost more than $1 billion, the agency said.