The Securities and Exchange Commission 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 but told other investors that the securities were selected by an independent, objective third party.
It says the bank misstated and omitted key facts about the RMBS tied to sub- prime mortgages as the US housing market was beginning to falter.
The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation that hinged on the performance of sub-prime RMBS, known as Abacus
It says Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.
The SEC alleges that one of the world’s largest hedge funds, Paulson & Co, paid Goldman Sachs to structure a transaction in which Paulson & Co. could take short positions against mortgage securities based on a belief that the securities would fail.
Robert Khuzami, director of the division of enforcement at SEC, says: “The product was new and complex but the deception and conflicts are old and simple.”
It estimates investors lost around £650m from Abacus
Goldman vice president Fabrice Tourre, who the SEC says was principally behind the creation of Abacus, was also charged.