Apr 16, 2010
U.S. government accuses Goldman Sachs of fraud
A Wall Street bombshell: The SEC takes the investment bank to court, just as debate over financial reform heats up
By Andrew Leonard
The vampire squid is under attack! How it will end is anybody's guess, but for now, the first line of the Security and Exchange Commission's complaint against Goldman Sachs accusing the investment bank of securities fraud must sound like sweet sweet music to anyone who has long been outraged by the Wall Street machinations at the heart of the financial crisis.
The Commission brings this securities fraud action against Goldman, Sachs & Co. ("GS&Co") and a GS&Co employee, Fabrice Tourre ("Tourre"), for making materially misleading statements and omissions in connection with a synthetic collateralized debt obligation ("CDO") GS&Co structured and marketed to investors.
The New York Times' Gretchen Morgenson and Louise Story scooped the rest of the business press with news of the SEC action, which launches perhaps the most dramatic confrontation between the U.S. government and an American corporation since Bill Clinton's Justice Department brought an antirust suit against Microsoft. The details of the complaint are complex, but the heart of the story is very simple.
According to the SEC complaint, in early 2007, at the request of John Paulson, a prominent hedge fund trader, Goldman Sachs created a security -- called Abacus 2007 AC-1 -- built from underlying mortgage-backed securities that Paulson had cherry-picked as most likely to blow up. While Goldman Sachs then turned around and sold the security to its own clients, Paulson and Goldman bought credit default insurance on the underlying mortgage bonds. Paulson and Goldman cashed in, while Goldman's clients lost millions. At no time did Goldman divulge Paulson's involvement to its clients...