It has alleged that Goldman Sachs and one of its vice presidents defrauded investors by marketing a financial product that was hinged on the performance of sub-prime mortgages, as the market began to falter in the US.
The SEC said Goldman Sachs failed to disclose that one of the largest hedge funds in the world, Paulson & Co, which has a significant role in the portfolio selection process, had betted against the securities.
In addition, SEC alleged Goldman Sachs vice president Fabrice Tourre was directly involved in structuring the product and knew of Paulson & Co’s undisclosed interest and involvement in the selection process.
Investors in the product, known as Abacus, are reported to have lost over $1bn.
Goldman Sachs shares fell more than 10% on news of the accusations.
Robert Khuzami, director of the division of enforcement for the SEC, said “The product was new and complex but the deception and conflicts are old and simple. 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.”
