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April 16, 2010

Goldman Sachs charged with fraud

by Gill Montia

Story link: Goldman Sachs charged with fraud

The US Securities and Exchange Commission (SEC) has charged Goldman Sachs and one of its vice presidents with defrauding investors by “misstating and omitting key facts” about a financial product tied to US sub-prime mortgages.

In 2007, the bank structured and marketed a collateralised debt obligation (CDO) known as ABACUS 2007-AC1.

The SEC alleges that the Wall Street bank allowed one of its clients, hedge fund Paulson & Co, to package up the mortgages contained in the CDO.

However, in doing so, it failed to disclose to investors vital information, in particular the role that Paulson & Co played in the selecting the mortgage portfolio that made up the CDO, and the fact that the hedge fund had taken a short position against the CDO, the SEC alleges.

SEC director of the division of enforcement, Robert Khuzami, says: “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 also alleges that Goldman Sachs Vice President, Fabrice Tourre, was principally responsible for ABACUS 2007-AC1.

The bank has so far answered the allegations stating: “The SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation.”

 

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