The Securities and Exchange Commission on Friday filed a civil suit against Goldman Sachs, accusing the bank of defrauding investors with a collateralized debt obligation (CDO) that was meant to fail.
The suit says Goldman structured and marketed a CDO relying on mortgage-backed securities that were selected with significant involvement from Paulson & Co., a large hedge fund. Investors weren't told of Paulson & Co.'s involvement, or that the hedge fund was taking short positions against the investments--betting they would default.
Along with Goldman Sachs the suit names Fabrice Tourre, a vice president at the bank who the complaint alleges was principally responsible for the CDO. The SEC complaint alleges investors lost more than $1 billion from the investment.
"The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, Director of the Division of Enforcement, in an SEC statement. "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."
Read the full SEC press release here: http://sec.gov/news/press/2010/2010-59.htm
Read an in-depth story from the New York Times here: http://www.nytimes.com/2010/04/17/business/17goldman.html?src=tptw