Goldman Sachs charged with fraud
Source: Agencies |
April 18, 2010, Sunday
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Print Edition
Print Edition
THE US government has accused Wall Street's most powerful firm of fraud, saying Goldman Sachs & Co sold mortgage investments without telling buyers the securities were crafted with input from a client who was betting on them to fail.
And fail they did. The securities cost investors close to US$1 billion while helping Goldman client Paulson & Co, a hedge fund, capitalize on the housing bust.
The Goldman executive accused of shepherding the deal allegedly boasted about the "exotic trades" he created "without necessarily understanding all of the implications of those monstrosities!!!"
The civil charges filed by the Securities and Exchange Commission on Friday are the government's most significant legal action related to the mortgage meltdown that ignited the financial crisis and helped plunge the country into recession.
The news sent Goldman Sachs shares and the stock market reeling as the SEC said other financial deals related to the meltdown continue to be investigated. It was a blow to the reputation of a financial giant that had emerged relatively unscathed from the economic crisis.
Goldman Sachs denied the allegations. It called the SEC's charges "completely unfounded in law and fact" and said it will contest them.
The SEC is seeking to recoup the money lost by investors and impose unspecified civil fines against Goldman Sachs and the executive, Fabrice Tourre. The SEC could enter into settlement negotiations over the amount if Goldman changed its stance and decided not to fight the charges in a trial.
The SEC said Paulson paid Goldman roughly US$15 million in 2007 to devise an investment tied to mortgage-related securities that the hedge fund viewed as likely to decline in value. Separately, Paulson took out a form of insurance that allowed it to make a huge profit when those securities' value plunged.
The fraud allegations focus on how Goldman sold the securities. Goldman told investors that a third party, ACA Management LLC, had selected the pools of subprime mortgages it used to create the securities. The securities are known as synthetic collateralized debt obligations.
Tourre, 31, has since been promoted to executive director of Goldman Sachs in London. Paulson & Co is run by John Paulson, who reaped billions by betting against subprime mortgage securities. John Paulson was among the first on Wall Street to bet heavily against subprime mortgages. His firm earned more than US$15 billion in 2007. He pocketed US$3.7 billion.
And fail they did. The securities cost investors close to US$1 billion while helping Goldman client Paulson & Co, a hedge fund, capitalize on the housing bust.
The Goldman executive accused of shepherding the deal allegedly boasted about the "exotic trades" he created "without necessarily understanding all of the implications of those monstrosities!!!"
The civil charges filed by the Securities and Exchange Commission on Friday are the government's most significant legal action related to the mortgage meltdown that ignited the financial crisis and helped plunge the country into recession.
The news sent Goldman Sachs shares and the stock market reeling as the SEC said other financial deals related to the meltdown continue to be investigated. It was a blow to the reputation of a financial giant that had emerged relatively unscathed from the economic crisis.
Goldman Sachs denied the allegations. It called the SEC's charges "completely unfounded in law and fact" and said it will contest them.
The SEC is seeking to recoup the money lost by investors and impose unspecified civil fines against Goldman Sachs and the executive, Fabrice Tourre. The SEC could enter into settlement negotiations over the amount if Goldman changed its stance and decided not to fight the charges in a trial.
The SEC said Paulson paid Goldman roughly US$15 million in 2007 to devise an investment tied to mortgage-related securities that the hedge fund viewed as likely to decline in value. Separately, Paulson took out a form of insurance that allowed it to make a huge profit when those securities' value plunged.
The fraud allegations focus on how Goldman sold the securities. Goldman told investors that a third party, ACA Management LLC, had selected the pools of subprime mortgages it used to create the securities. The securities are known as synthetic collateralized debt obligations.
Tourre, 31, has since been promoted to executive director of Goldman Sachs in London. Paulson & Co is run by John Paulson, who reaped billions by betting against subprime mortgage securities. John Paulson was among the first on Wall Street to bet heavily against subprime mortgages. His firm earned more than US$15 billion in 2007. He pocketed US$3.7 billion.
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