Goldman Sachs Group on Friday was sued by the SEC for fraud tied to collateralized debt obligations that contributed to the worst financial crisis since the Great Depression.
Goldman Sachs misstated and omitted key facts about a financial product tied to subprime mortgages as the U.S. housing market was starting to falter, the SEC said in a statement. The SEC also sued Fabrice Tourre, a Goldman Sachs vice president.
“The product was new and complex, but the deception and conflicts are old and simple,” SEC Enforcement Director Robert Khuzami said in the 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 alleged that Goldman Sachs, led by CEO Lloyd Blankfein, structured and marketed CDOs that hinged on the performance of subprime mortgage-backed securities. The firm failed to disclose to investors that hedge fund Paulson & Co. was betting against the CDO, known as Abacus, and influenced the selection of securities for the portfolio, the SEC said. Paulson wasn't accused of wrongdoing.
Goldman Sachs called the SEC’s charges “completely unfounded in law and fact, and we will vigorously contest them and defend the firm and its reputation.” In a separate statement, the manager said it lost more than $90 million on the transaction and paid a $15 million fee. “We were subject to losses and we did not structure a portfolio that was designed to lose money,” according to the statement.
Paulson & Co. said in a statement it had no authority over the selection of assets linked to the Goldman Sachs CDO.
(Click here to view the full complaint.)