The Securities and Exchange Commission (SEC) has charged investment firm Goldman Sachs with fraud in connection to sales of synthetic collateralized debt obligations (CDOs).
According to the SEC’s complaint, Goldman Sachs failed to disclose critical information about the CDOs to investors, including their ties to a major hedge fund whose investments Goldman allegedly was betting against. Meanwhile, as investors suffered huge financial losses totaling billions of dollars, Goldman itself profited.
The hedge fund, Abacus 2007-AC1, contained mortgage investments that were most likely to lose value, says the SEC. Abacus was then marketed and sold to investors such as pension funds, insurance companies and other hedge funds.
As reported April 16 by the New York Times, the SEC’s lawsuit against Goldman 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.
“The product was new and complex, but the deception and conflicts are old and simple,” Robert Khuzami, director of the SEC’s division of enforcement, said in a 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,” Khuzami said.