SEC charges Goldman Sachs in loan-fund rip-off

The government today filed civil fraud accusations against Goldman Sachs, alleging the Wall Street investment bank, whose veteran bosses have held a string of top financial positions in U.S. government, helped billionaire hedge fund manager John Paulson stack the deck against other investors by picking which troubled mortgage bonds to sell unwitting clients. Paulson wasn't charged with wrongdoing.

"The Securities and Exchange Commission today filed securities fraud charges against Goldman, Sachs & Co. and a GS&Co employee... for making material misstatements and omissions in connection with a synthetic collateralized debt obligation [which Goldman Sachs] structured and marketed to investors," the SEC says here (page links to case).

"Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc., with economic interests directly adverse to investors" in Goldman Sachs' Abacus 2007 debt portfolio, "played a significant role in the portfolio selection process.

"After participating in the selection of the reference portfolio, Paulson effectively shorted the [mortgage securities] portfolio it helped select by entering into credit default swaps with Goldman Sachs & Co. to buy protection...  Given its financial short interest, Paulson had an economic incentive to choose [securities] that it expected to experience credit events in the near future. Goldman Sachs & Co. did not disclose Paulson's adverse economic interest or its role in the portfolio selection process."

Goldman says they didn't do it: "The SEC's charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation."

Goldman shares down 10 percent, S&P500 off 1 percent on the news, says Bloomberg here. In Congress, Sen. Ted Kaufman, D-Del., cheered the SEC for taking action: "I applaud [SEC enforcement chief] Robert Khuzami and his team". Also said he didn't "pre-judge" Goldman.