Already facing a fraud lawsuit by the Securities and Exchange Commission (SEC) related to collateralized debt obligations (CDOs), Goldman Sachs says additional CDO lawsuits over its mortgage-trading activities are likely in the coming months.

“We anticipate that additional putative shareholder derivative actions and other litigation may be filed, and regulatory and other investigations and actions commenced against us with respect to offering of CDOs,” Goldman Sachs said in its 10-Q filing with the SEC on May 10.

The SEC’s lawsuit against Goldman accuses the investment bank and Vice President Fabrice Tourre of misleading investors about a mortgage-linked security and the role the hedge fund, Paulson & Co., played in selecting and then betting against the investment.

Following the SEC’s lawsuit, Goldman Sachs stock fell 22%.

Last month, current and former Goldman Sachs executives, including CEO Lloyd Blankfein and Tourre, faced intense grilling by the Senate’s Permanent Subcommittee on Investigations. Members of the committee subsequently released potentially damaging e-mails that showed various Goldman Sachs employees questioning the securities at the heart of the SEC’s lawsuit and referring to them as “junk.”

Goldman also warned in its 10Q filing that any settlement with the SEC could affect its business operations, including potentially hindering its core broker/dealer activities, as well as its ability to advise mutual funds.

Goldman Sachs, looking to unload toxic securities connected to the U.S. housing market, stepped up its efforts to sell those products to clients in 2006 and 2007, according to newly disclosed internal emails. The emails, some of which were from Goldman Sachs CEO Lloyd Blankfein, show that Goldman’s employees discussed how to “arm” its salespeople to get rids of the bonds that the company deemed too risky to keep.

The emails were released publicly on April 27 by Senator Carl Levin. Levin heads the Senate’s Permanent Subcommittee on Investigations, which is conducting a hearing about Goldman’s role in the financial crisis. Earlier this month, the Securities and Exchange Commission (SEC) filed fraud charges against Goldman and one of its employees, Fabrice Tourre.

Goldman continues to deny that it did anything wrong when it created a synthetic collateralized loan obligation that caused about $1 billion in losses while undertaking other transactions that allowed the company to profit when the housing market collapsed.

During the Senate hearing, Senator Levin said that Goldman had advertised itself as having a responsibility to its clients, “yet the evidence shows that Goldman repeatedly put its own interests and profits ahead of the interests of its clients.” Levin further stated that Goldman had crossed “ethical lines” in selling collateralized debt obligations to clients while standing to gain from their losses.

The “Fabulous Fabrice Tourre,” as he refers to himself in an e-mail cited in an April 16 securities fraud lawsuit filed by the Securities and Exchange Commission, is reportedly set to rake in a massive bonus courtesy of his employer Goldman Sachs.

An April 18 story in the Guardian first reported the bonus news, which is set to be announced on April 20 by Goldman Sachs CEO Lloyd Blankfein as part of the first-quarter 2010 financial results for the bank.

News of Tourre’s potential bonus comes on the heels of the SEC’s lawsuit against the VP and Goldman Sachs over claims involving a package of collateralized debt obligations – called Abacus 2007-AC1 – that regulators contend was designed to fail. According to the civil complaint, Tourre knew that the hedge fund, Paulson and Company, had helped select the assets backing Abacus while at the same time betting on it fail.

The SEC further alleges that Tourre misled a collateral manager, ACA Management, about Paulson’s role.

“Marketing materials for Abacus 2007-AC1 were false and misleading because they represented that ACA selected the reference portfolio while omitting any mention that Paulson, a party with economic interests adverse to CDO investors, played a significant role in the selection of the reference portfolio,” the complaint reads.

The SEC’s complaint also includes potentially damning e-mails from Tourre about Abacus. One of those e-mails states the following:

“Only potential survivor, the fabulous Fab standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!”

According to an April 19 article in the Wall Street Journal, Tourre received a paycheck of more than $2 million in 2007. The compensation was reportedly due in part to the success of the CDO at the center of the SEC’s lawsuit. Meanwhile, Tourre apparently has taken an “indefinite vacation” but remains employed at Goldman Sachs.

The fraud lawsuit involving Fabrice Tourre and Goldman Sachs may be just the tip of the iceberg for Wall Street. On April 16, the SEC accused Tourre, a VP at Goldman Sachs, and the bank of creating and selling high-risk collateralized debt obligations tied to mortgages without disclosing to investors the role of a hedge that helped picked the underlying securities and then bet against them to fail.

A number of analysts now say the probe may prompt additional investigations in CDOs at other Wall Street firms.

“This is probably just the tip of the iceberg,” said Chizu Nakajima, director of the Centre for Financial Regulation and Crime at Cass Business School in London, in an April 19 article in Investment News. “As far as other financial institutions are concerned, they are obviously very worried. If the SEC’s action is actually successful, it could well open up the gates to other litigation worldwide.”

Besides Goldman Sachs, at least 20 banks arranged more than $400 billion CDO deals in 2007 – the same time that the U.S. housing market began to collapse. Citigroup was the leader of those deals, followed by Merrill Lynch and Deutsche Bank, according to the Investment News story.

The New York Post reported this morning that the SEC is now investigating transactions structured by other big players in the CDO market, including Deutsche Bank, UBS and Merrill Lynch.

A recent lawsuit against Fabrice Tourre may be emblematic of public sentiment regarding Wall Street. The Securities and Exchange Commission (SEC) filed a civil lawsuit against Tourre and his employer, Goldman Sachs, on April 16, accusing the duo of defrauding investors by misstating and omitting key facts about a financial product tied to mortgage-related investments.

The focus of the lawsuit is on a collateralized debt obligation that Tourre created. The performance of that CDO, called Abacus, was linked to the performance of the housing market. When the housing market tanked, so, too, did Abacus. The SEC isn’t focused on that aspect, however. Its lawsuit concerns a hedge fund, Paulson & Co., which selected the losing assets that went into Abacus and then bet against them. Goldman never revealed Paulson’s role to investors, according to the SEC.

Meanwhile, another company became involved in the deal – ACA Management. Allegedly, Goldman and Tourre convinced ACA that Paulson was investing in Abacus, instead of betting against it.

The SEC’s complaint accuses Tourre as the person principally responsible for ABACUS 2007-AC1. Tourre structured the transaction, prepared the marketing materials, and communicated directly with investors, the SEC says. Tourre also allegedly knew of Paulson & Co.’s undisclosed short interest and role in the collateral selection process.

In addition, Tourre is charged with misleading ACA into believing that Paulson & Co. invested approximately $200 million in the equity of ABACUS, indicating that Paulson & Co.’s interests in the collateral selection process were closely aligned with the interests of ACA. In reality, however, their interests were sharply conflicting.

In the end, Paulson paid Goldman $15 million for putting Abacus together. Investors lost more than $1 billion, while Paulson made a profit of $1 billion, the SEC says.

The name Fabrice Tourre probably wasn’t widely recognized – until now. The Securities and Exchange Commission (SEC) filed a civil lawsuit against the Goldman Sachs broker and his employer last week for their connection to a complex financial product – known as Abacus 2007-AC1 – that was filled with equally complex and high-risk synthetic collateralized debt obligations (CDOs).

According to the SEC’s 22-page complaint, Goldman and Tourre are alleged to have knowing deceived investors when they marketed and sold Abacus. In addition, the SEC says Goldman failed to disclose that one of its clients, Paulson & Co., actually helped choose the risky securities that were packaged into Abacus. Moreover, Goldman did not disclose that Paulson, one of the world’s largest hedge funds, had bet that the value of the securities would fall, the SEC says.

Tourre was the mastermind behind the creation of Abacus, and agreed to the deal with Paulson in April 2007, the SEC claims. Regulators allege, however, that Tourre knew the market in mortgage-backed securities was about to be hit well before April 2007.

The SEC’s April 16 lawsuit against Goldman Sachs and Tourre contains a number of potentially incriminating e-mails from Tourre, one of which reads as follows:

“More and more leverage in the system. Only potential survivor, the fabulous Fab[rice Tourre]… standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!”

Tourre, 31, currently resides in London as executive director of Goldman Sachs International. He’s apparently worked for Goldman since 2001.

French trader Fabrice Tourre and his employer, Goldman Sachs, are being sued by the Securities and Exchange Commission (SEC) for allegedly devising a package of highly risky credit default swaps (CDS) and then betting against the investments – and their clients – to fail. The deals produced massive losses for investors but big profits for Tourre and, ultimately, for Goldman Sachs.

The SEC filed its civil lawsuit on April 16, and the move seems to confirm what many people have long believed: The world of Wall Street is indeed rigged, and investors are the ones who wind up on the losing end.

“The SEC suit against Goldman, if proven true, will confirm to people their suspicions about the total selfishness of these financial institutions,” said Steve Fraser, a Wall Street historian, in an April 18 article in the New York Times. “There’s nothing more damaging than that. This is way beyond recklessness. This is way beyond incompetence. This is cynical, selfish exploiting.”

Tourre is the only Goldman Sachs employee named in the SEC’s complaint. As for the deals Tourre created, they consisted of collateralized debt obligations (CDOs), which were contingent on the performance of risky mortgage-related securities. Those details, however, were never disclosed to investors, according to the SEC.

In the SEC’s complaint, Tourre is accused of structuring the CDO, called ABACUS 2007-AC1, with input from the hedge fund Paulson & Co. The CDO itself held some of the riskiest assets around, a key fact that allegedly was never stated in any marketing materials related to ABACUS or by Tourre when he sold the investments to investors. Regulators say Paulson then bet against the CDO. Again, investors in the CDO were never told about Paulson’s role or intentions.

When the housing market began to spiral out of control in 2007 and 2008, ABACUS felt the pain. In an e-mail that Tourre sent to a friend on Jan. 23, 2007, he states the following:

“More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab[rice Tourre]…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!”

Another e-mail from Tourre – this one dated Feb. 11, 2007 – reads as follows:

“The CDO biz is dead we don’t have a lot of time left.”

And neither did investors as it turns out. When the housing market collapsed, investors in ABACUS 2007 AC1 suffered losses of more than $1 billion, according to the SEC. Paulson, meanwhile, made a profit of about $1 billion. And Goldman Sachs? It was paid about $15 million for structuring the bonds and selling them to investors.

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.

An obscure hedge fund called Magnetar offers new details into the world of collateralized debt obligations (CDOs) and how the instruments cost investors billions while yielding a payday bonanza for Magnetar. And that’s the irony. What Magnetar did appears to be legal.

Magnetar and the toxic deals it created and then bet against are the subject of an investigative story by ProPublica and co-produced with Chicago Public Radio’s This American Life and NPR’s Planet Money.

The short version of Magnetar – which was started up by former Citadel trader Alec Litowitz – begins with the Chicago hedge fund buying up the riskiest portion of CDOs. At the same time, Magnetar placed bets that portions of its own deals would fail. Meanwhile, Magnetar ended up reaping a massive fortune.

Magnetar worked with most of Wall Street’s top banks in its deals – deals that ultimately produced $40 billion worth of extremely toxic, high-risk CDOs. Among the banks that helped sell those toxic assets to investors: Merrill Lynch, Lehman Brothers, Citigroup, UBS and JPMorgan Chase.

“Along the way, it did something to enhance the chances of that happening, according to several people with direct knowledge of the deals. They say Magnetar pressed to include riskier assets in their CDOs that would make the investments more vulnerable to failure. The hedge fund acknowledges it bet against its own deals but says the majority of its short positions, as they are known on Wall Street, involved similar CDOs that it did not own. Magnetar says it never selected the assets that went into its CDOs.”

ProPublica offers an excellent slideshow of how Magnetar orchestrated its CDO deals. Entitled The Anatomy of the Magnetar Trade, the slides provide a straightforward and simple account of the players involved in the CDO market and how when the instruments ultimately collapsed, Magnetar profited.

The complete (5,900 words) story on Magnetar is well worth the read. You can view the story in its entirety here.

Synthetic collateralized debt obligations, or CDOs, are complex mortgage-linked debt products that have been blamed for bringing Wall Street to its knees and pummeling millions of investors in the process. It was in the fall of 2007, when the financial markets first started to become unhinged, that these high-risk instruments found their way into the public’s eye.

Today, CDOs are a hot topic on Capitol Hill, where members of Congress and regulators like the Securities and Exchange Commission (SEC) are trying to determine exactly how and why synthetic CDOs created the financial tsunami that they did.

As reported Dec. 24 in an article by Gretchen Morgenson and Louise Story for the New York Times, regulators are said to be looking at whether current securities laws or rules of fair dealing were violated by the investment firms and banks that created and sold CDOs and then turned around to bet against clients who purchased them.

“One focus of the inquiry is whether the firms creating the securities purposely helped to select especially risky mortgage-linked assets that would be most likely to crater, setting their clients up to lose billions of dollars if the housing market imploded,” the article says.

Pension funds and insurance companies are some of the institutional investors that lost billions of dollars on synthetic CDOs – investments they thought were safe investments.

The New York Times article devotes space mainly to the synthetic collateralized debt obligation business of Goldman Sachs and, specifically, mortgage-related securities called Abacus synthetic CDOs. Abacus CDOs were developed by Goldman trader Jonathan Egol, who had the idea that they would protect Goldman from investment losses if the housing market ever collapsed.

According to the article, when the market did tank, Goldman created even more of these securities, enabling it to pocket huge profits. Meanwhile, clients of Goldman who purchased the CDOs – and who thought they were solid investments – lost big.

One can easily infer from the article and other news reports on the subject that Goldman put the best interests of clients in harm’s way with Abacus because it not only served as the structurer of the deals involving the product, but also held onto the short side of those same deals. In other words, the company would be advising clients to buy assets that, in turn, it was betting to fail.

Goldman certainly is not the only investment firm that employed this strategy. Others banks created similar securities that they sold to clients and then bet against the future performance of those assets.

Goldman and other investment banks will soon have to answer tough questions about accountability and fiduciary duty. In the meetings being held on Capitol Hill, the Financial Crisis Inquiry Commission – a group that has been compared to the 9/11 Commission – plans to call several panels of investment banks to appear as witnesses. Among them: CEOs of Goldman Sachs, Morgan Stanley, JP Morgan Chase, and Bank of America.