WASHINGTON — The Securities and Exchange Commission charged Goldman Sachs & Co. and one of its executives with fraud today in a risky offshore deal backed by subprime mortgages that cost investors more than a $1 billion.
The SEC also contends that Goldman allowed a client, Wall Street hedge fund Paulson & Co., to help select the securities. Paulson in turn bought insurance against the deal and when the securities later tanked, losing almost all of their value, Paulson made a $1 billion profit.
The civil fraud charges were the first to be filed against Goldman, the Wall Street investment banking titan at the center of multiple inquiries into the causes of the global financial meltdown.
Goldman said in 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."
Paulson has acknowledged reaping a $3.7 billion profit by betting against the housing market as it nose dived in 2006 and 2007.
The securities were part of a series of offshore deals known as ABACUS.
The Goldman executive, vice president Fabrice Tourre, 31, was principally responsible for structuring the ABACUS deal known as 2007-AC1, a so-called synthetic package in which investors did not buy any actual securities. Instead, they bet on the performance of specified bundle of home loans to marginally qualified borrowers.
The complaint, filed in U.S. District Court for the Southern District of New York, charges Tourre with making “materially misleading statements and omissions” to investors.
Robert Khuzami, the SEC’s enforcement chief, was asked on a conference call whether anyone higher up in Goldman might face charges.
“We charged those that we felt appropriate, based on the evidence and the law,” Khuzami replied.
The complaint alleged that Paulson, one of the world’s largest hedge funds, paid Goldman to put together a deal in which Paulson would select certain of the mortgage securities and then take short positions, or bet against them.
The marketing materials for the investment, known as a collateralized debt obligation, all represented that the mortgage-backed securities were selected by ACA Management LLC, a third party.
“The product was new and complex, but the deception and conflicts are old and simple,” 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 deal, one of about two dozen similar bundles in the ABACUS series, closed on April 26, 2007. Paulson paid Goldman about $15 million for structuring and marketing the deal. Within six months, 83 percent of the mortgage-backed securities in the bundle had been downgraded and 27 percent were placed on negative watch by Wall Street ratings agencies, the complaint said.
By the following Jan. 29, it said, 99 percent of the portfolio had been downgraded, costing investors more than $1 billion. It said Paulson’s contrary bets yielded a profit of about $1 billion.
Khuzami said that Paulson was not charged because it did mislead investors.
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