From the Huffington Post:
The government has accused Goldman Sachs of defrauding investors by failing to disclose conflicts of interest in mortgage investments it sold as the housing market was faltering.
The Securities and Exchange Commission announced Friday civil fraud charges against the Wall Street powerhouse and one of its executives. The agency alleges Goldman failed to disclose that one of its clients helped create -- and then bet against -- subprime mortgage securities that Goldman sold to investors. In essence, Goldman is accused of pushing a mortgage investment that was secretly devised to fail.
Investors in the mortgage securities are alleged to have lost more than $1 billion, the SEC noted.
The SEC claims Goldman Sachs and one of its top officers misled investors by not disclosing that hedge fund manager John Pauson, who made billions betting against the housing market, selected the assets that went into a complex security called "Abacaus."
Paulson & Co. is one of the world's largest hedge funds, and paid Goldman roughly $15 million for structuring these deals in 2007.
"The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen," finance expert Sylvain R. Raynes told the New York Times about such deals. "When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else's house and then committing arson."
Goldman Sachs shares fell more than 10 percent after the SEC announcement.
The civil lawsuit filed by the SEC in federal court in Manhattan is the government's most significant legal action related to the mortgage meltdown that ignited the financial crisis and helped plunge the country into recession.
A Goldman Sachs spokesman didn't immediately return a call seeking comment. The firm vigorously denied the charges, issuing a statement: "The SEC's charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation."
The agency also charged a Goldman vice president, Fabrice Tourre, 31, who it said was principally responsible for devising the deal and marketing the securities.
The SEC is seeking unspecified fines and restitution from Goldman Sachs and Tourre.
"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."
As the New York Times notes in its in-depth story on the subject, the charges are "the first time that regulators have taken action against a Wall Street deal that helped investors capitalize on the collapse of the housing market."