Remember the embarassing Goldman hearings and the fabulous Fab?
Washington – The Securities and Exchange Commission Friday charged Goldman Sachs & Co. and one of its executives with fraud in a risky offshore deal backed by subprime mortgages that cost investors more than $1 billion.
The SEC also contends that Goldman allowed a client, Wall Street hedge fund Paulson & Co., to help select the securities to be sold. Paulson in turn bought insurance against the deal and when the securities tanked, losing almost all their value, Paulson made a $1 billion profit.
The civil fraud charges were the first to be filed against Goldman, the prestigious Wall Street investment-banking titan that’s at the center of multiple inquiries into the causes of the global financial meltdown.
Paulson has acknowledged that it reaped a $3.7 billion profit by betting against the housing market as it nose-dived in 2006 and 2007.
The securities cited by the SEC were part of a series of offshore sales 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 didn’t buy any actual securities. Instead, they bet on the performance of a 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.
Cornelius Hurley, a former counsel to the Federal Reserve Board who now heads the Boston University law school’s Morin Center for Banking and Financial Law, called the complaint “stunning” and said it raises at least two questions:
- Was this an isolated incident at Goldman, or did the firm engage in similar “egregious” practices in other deals?
- Did other Wall Street firms engage in similar practices?
“It appears that the financial ‘protection’ provided by Goldman and described in the SEC complaint may have been more akin to the kind of protection provided by organized crime,” Hurley said