Goldman Sachs charged with sub-prime mortgage securities fraud
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Goldman Sachs has been charged by the Securities and Exchange Commission for defrauding investors by omitting key facts about a financial product tied to US sub-prime mortgages.
In April 2007, Goldman Sachs structured a synthetic collateralised debt obligation that hinged on the performance of sub-prime residential mortgage-backed securities. The SEC alleges that Goldman allowed a large hedge fund, Paulson & Co, to select the securities within the CDO that it thought would be downgraded and then allowed Paulson & Co to buy credit default swaps that would pay out in the event that the securities defaulted. The SEC says Paulson & Co paid Goldman $15m (£9.7m) for setting up the CDO.
It is alleged that Goldman Sachs withheld this information from investors into the CDO known as ABACUS, and instead informed them that the RMBS has been selected by ACA Management.
The SEC alleges that Goldman Sachs vice president Fabrice Tourre was responsible for the fraud. Tourre structured the transaction, prepared the marketing materials, and communicated directly with investors. Tourre allegedly knew of Paulson & Co’s undisclosed short interest and role in the collateral selection process.
By October 2007, 83 per cent of the RMBS within the CDO had been downgraded. By January 2008, 99 per cent had been downgraded. The SEC says ABACUS investors have lost more than $1bn (£647m).
SEC division of enforcement director Robert Khuzami says: “The product was new and complex but the deception and conflicts are old and simple.
“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.”
Goldman Sachs began trading on the New York stock exchange this morning at $183.62 but fell to a low of $155.55, a drop of more than 15 per cent less than one hour after the SEC announcement.
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