Saturday, April 17, 2010
US bank Goldman Sachs has been accused of fraud by the American regulator Securities and Exchange Commission (SEC).
| Goldman Sachs arranged a transaction at Paulson’s request in which Paulson heavily influenced the selection of the portfolio to suit its economic interests | ||
According to the SEC, Goldman Sachs failed to inform investors of a conflict of interest in the banks’ marketing of sub-prime mortgage investments, which were being sold at a time of uncertainty in the US housing market. The SEC says that a Goldman subsidiary, Paulson & Co, had been involved in the selection of securities included in the mortgage investments. It had not been disclosed to investors that Paulson had bet that the value of the investments would fall, benefiting Paulson but not those who bought the investments.
The securities, which were combined into a package called Abacus that was sold to investors, lost over $1 billion during the collapse of the US housing industry. According to the SEC, Goldman, Paulson, and the creator of Abacus, a vice-president of Goldman Sachs named Fabrice Tourre, all knew that the housing market was going to collapse, but continued to sell Abacus despite the risks.
Tourre had been in command of selecting the investments within Abacus, and then was the person responsible for selling it to investors. He had told those who invested in Abacus that its components had been selected by an independent party, ACA Management.
In all, 99% of the investments within Abacus were downgraded, and investors lost upwards of a billion US dollars.
The SEC alleged that “Goldman Sachs arranged a transaction at Paulson’s request in which Paulson heavily influenced the selection of the portfolio to suit its economic interests.” In a short response from Goldman, the bank said that “The SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation.”