SEC sues Goldman Sachs for fraud tied to CDOs

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

Goldman Sachs misstated and omitted key facts about a financial product tied to subprime mortgages as the US housing market was starting to falter, the Securities and Exchange Commission said in a statement today. The SEC also sued Fabrice Tourre, a Goldman Sachs vice president.

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

The SEC alleged that Goldman Sachs, led by Chief Executive Officer Lloyd Blankfein, 55, structured and marketed CDOs that hinged on the performance of subprime mortgage-backed securities. The New York-based firm failed to disclose to investors that hedge fund Paulson & Co. was betting against the CDO, known as Abacus, and influenced the selection of securities for the portfolio, the SEC said. Paulson wasn’t accused of wrongdoing.

A gauge of banks and brokerages in the Standard & Poor’s 500 Index sank 3.9 per cent for the top loss among 24 groups after the SEC announced its action. Bank of America Corp and JPMorgan Chase & Co lost at least 3.5 per cent as all 27 companies in the S&P 500 Diversified Financial Index declined.

“This gave the politicians everything they need to push for stronger financial reform and it’s going to further shake investor confidence in Wall Street,” said Matthew McCormick, a banking-industry analyst and portfolio manager at Bahl & Gaynor Inc in Cincinnati, which oversees $2.8 billion.

Shares of Goldman Sachs fell $23.64, or 13 per cent, to $160.63 as of 11:37 am in New York Stock Exchange trading. It was the biggest one-day drop since January 20, 2009.

Goldman Sachs spokesman Lucas Van Praag didn’t return a call and an e-mail seeking comment. A call to Richard Klapper, an attorney for Goldman Sachs at Sullivan & Cromwell LLP, wasn’t returned. Tourre, reached by phone in London today, declined to comment. A call to Pamela Chepiga, a lawyer for Tourre at Allen & Overy LLP, wasn’t returned.

Stefan Prelog, a spokesman for New York-based Paulson & Co, said he couldn’t comment. The company oversees $32 billion.