Goldman Defrauded Investors, Costing Them $1 Billion: SEC

Wall Street giant Goldman Sachs was accused of securities fraud for allegedly failing to disclose conflicts of interest in subprime mortgage securities it sold to investors, who ultimately lost more than $1 billion.

The Securities and Exchange Commission said in a civil complaint Friday that Goldman failed to disclose that one of its clients—a hedge fund run by billionaire John Paulson—helped create, and then bet against, the subprime mortgage securities.

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The charges are a blow to the reputation of the most powerful firm on Wall Street, which earned a record $4.79 billion last quarter and has long profited from high-octane trading.

The allegations come as lawmakers seek to crack down on Wall Street practices that helped cause the financial crisis. Among proposals Congress is weighing are tougher rules for complex investments like those involved in the alleged Goldman fraud.

In a statement released Friday, Goldman called the SEC's charges "completely unfounded in law and fact" and said it will contest them.

And in a later statement, Goldman claimed that it lost money on the transaction—more than $90 million, it says. The firm added that it gave "extensive" disclosure about the securities in question to investors.

Goldman also said that ACA, the fund's largest investor with $951 million, selected the portfolio itself.

The Goldman client implicated in the fraud is one of the world's largest hedge funds, Paulson & Co, which paid Goldman roughly $15 million for structuring the deals in 2007.

Goldman Sachs shares

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[GS  Loading...      ()   ] fell sharply after the SEC announcement, which also caused shares of other financial companies to sink. The market itself also fell.

The civil lawsuit filed by the SEC in federal court in Manhattan was the government's most significant legal action related to the mortgage meltdown that ignited the financial crisis and helped plunge the country into recession.

The SEC's enforcement chief said the agency is investigating a broad range of practices related to the crisis.

The agency also charged a Goldman vice president, Fabrice Tourre, 31, who it said was principally responsible for devising the deal and marketing the securities. The SEC is seeking unspecified fines and restitution from Goldman Sachs and Tourre.

Tourre, an executive director in London of Goldman Sachs International, was a vice president at the company's New York headquarters at the time of the activities in early 2007, the SEC said.