The government has accused Goldman Sachs of defrauding investors by failing to disclose conflicts of interest in mortgage investments it sold as the housing market was faltering. The Securities and Exchange Commission announced Friday civil fraud charges against the Wall Street giant and one of its vice presidents. The agency alleges Goldman failed to disclose that one of its clients helped create, and then bet against, subprime mortgage securities that Goldman sold to investors.
The move marks the first time that regulators have taken action against a Wall Street deal that helped investors capitalize on the collapse of the housing market. Goldman itself profited by betting against the very mortgage investments that it sold to its customers.
The SEC’s civil fraud 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. Goldman didn’t tell investors that Paulson was shorting the collateralized debt obligation, or betting its value would fall. When the value plunged within months of its issuance, Paulson walked off with $1 billion. “The product was new and complex but the deception and conflicts are old and simple,” said Robert Khuzami, director of the Division of Enforcement for the SEC.