Goldman Sachs Sued by SEC for Fraud Tied to CDOs

Goldman Sachs Group Inc. was sued by U.S. regulators for fraud tied to collateralized debt obligations that contributed to the worst financial crisis since the Great Depression. The firm’s shares tumbled as much as 16 percent and financial stocks slumped.

Goldman Sachs created and sold CDOs tied to subprime mortgages in early 2007, as the U.S. housing market faltered, without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against them, the Securities and Exchange Commission said in a statement today. Billionaire John Paulson’s firm earned $1 billion on the trade and wasn’t accused of wrongdoing. The SEC also sued Fabrice Tourre, a Goldman Sachs vice president who helped create the CDOs.

“The product was new and complex but the deception and conflicts are old and simple,” SEC Enforcement Director Robert Khuzami said. “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.” ...
Decent backgrounder from McClatchy.

Just a civil case, so no perp walks anytime soon, but it's nice to see at least someone being brought to book for their willingness to blow up investors (and the entire U.S. financial system in the end) at will.

Just to pimp this great Propublica piece one more time, the parties involved (Paulson & Co and Goldman) were doing a variation of the Magnetar trade - creating a CDO designed to fail, selling the CDO to investors, and buying CDS insurance to profit from its failure. Paulson as the driving force, with Goldman as enabler and marketer to the investors. Goldman is being sued by the SEC for essentially hiding information/lying to investors.