SEC sues Goldman Sachs for securities fraud in subprime bond scam
April 16, 2010
(ChattahBox) – While the financial-reform debate rages on, the Securities and Exchange Commission has filed a civil suit against Goldman Sachs on Friday, charging the bank and one of its vice presidents Fabrice Tourre, with securities fraud. The lawsuit focuses on a specific financial instrument that Goldman created called the Abacus 2007-AC1. The SEC’s complaint alleges that Goldman allowed hedge fund Paulson & Co., run by John Paulson, who made billions of dollars betting on the subprime collapse — to help select securities in the collateralized debt obligation, or CDO. Goldman allowed Paulson to select the bonds he wanted to short, then it packaged those bonds in the Abacus 2007-AC1 and sold them to investors. Central to the SEC’s case is the allegation that investors in this CDO were told the components were chosen by an independent third party. Those investors eventually lost a billion dollars on the bond when the bubble burst while Paulson raked in a profit. Goldman itself profited by betting against the very mortgage investments that it sold to its customers. The NY Time writes, “[T]he deck was stacked against the Abacus investors, the complaint contends, because the investment was filled with bonds chosen by Mr. Paulson as likely to default.” The suit is the first time regulators have targeted a Wall Street deal that allowed investors to make money off the financial crisis.