The Securities & Exchange Commission today charged Goldman, Sachs & Co. and one of its vice presidents with fraud in marketing a financial product linked to subprime mortgages as the housing market was beginning to collapse.
The case is the latest in a series of SEC enforcement actions seeking to hold firms accountable for their role in the financial crisis of 2007 - 2008. As the SEC put it in its complaint filed in U.S. District Court for the Southern District of New York, Goldman's actions “contributed to the recent financial crisis by magnifying losses associated with the downturn in the United States housing market.”
Goldman Sachs is being represented by Richard Klapper, a partner at Sullivan & Cromwell in New York, according to Lorin Reisner, deputy director of the SEC’s Enforcement Division. Klapper did not return a call or email seeking comment.
Fabrice Tourre, the Goldman, Sachs vice president whom the SEC alleges was principally responsible for the financial product, has retained Allen & Overy partner Pamela Chepiga. Chepiga also did not return a call or email for comment.
SEC lawyers working on the case include Richard Simpson, Reid Muoio, Kenneth Lench, Cheryl Scarboro, James Kidney, Jeffrey Tao, Jason Anthony, Nicole Kelly, and Jeff Leasure.
Goldman allegedly misled investors of a collateralized debt obligation that was linked to the performance of subprime residential mortgage-backed securities. The problem was that Goldman failed to disclose key information – namely, the role that a major hedge fund, Paulson & Co., played in the portfolio selection process.
The SEC alleges that Paulson paid Goldman to structure the transaction so that Paulson could choose mortgage securities that it believed would experience credit events, and then take short positions against them.
"The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, director of the Division of Enforcement 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."
In an interview with The National Law Journal in October, Khuzami flagged cases related to the subprime credit crisis as one of his top enforcement priorities.
The SEC's complaint charges Goldman Sachs and Tourre with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5. The commission seeks injunctive relief, disgorgement of profits, prejudgment interest, and financial penalties.
In a statement, Goldman Sachs said that “The SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation.”