The Work

April 16, 2010 11:17 AM

SEC Charges Goldman Sachs with Fraud

Posted by Brian Baxter

UPDATE 2, 4/16/2010, 4:45 p.m. - The third and fourth paragraphs below have been updated with information reported later Friday from The New York Times and sibling publication Corporate Counsel.

While the reputation of Goldman Sachs may have taken a hit as a result of the financial crisis, the investment banking and securities firm could always hang its hat on the fact that it had never been tainted with charges of wrongdoing. Not anymore. In a stunning civil suit filed by the SEC on Friday, the government accuses Goldman of committing securities fraud.

The New York Times reports that the suit, which claims Goldman created and sold a collateralized debt obligation (CDO) secretly designed to fail, is the first action by taken by regulators against those that capitalized on the collapse of the U.S. housing market. The complaint (see below to download a copy) was filed in federal court in Manhattan.

Sibling publication Corporate Counsel reports that hedge fund Paulson & Co. paid Goldman roughly $15 million to structure the CDO so that it could take short positions against mortgage securities that it helped choose. The SEC claims that while other investors lost almost $1 billion on the CDO, Paulson earned almost $1 billion by betting against it.

Khuzami The Times reports that when asked by reporters why Paulson wasn't sued, SEC enforcement director Robert Khuzami (pictured right) said it was because Goldman was responsible for representations to investors, not Paulson. (Khuzami was participating in a panel discussion at Tulane University Law School's Corporate Law Institute on Friday.)

Also named as a defendant in the SEC suit is Fabrice Tourre, a Goldman vice president who helped create and sell the mortgage investment. The Times previously reported that Tourre, a French trader at Goldman, was one of a handful of Wall Street traders that profited from betting against bad debt that banks bundled for investors.

According to a spokesperson from the SEC, Sullivan & Cromwell partner Richard Klapper is representing Goldman Sachs in the suit. The firm has a longtime relationship with the bank.

Bloomberg is reporting that Allen & Overy's Pamela Chepiga is representing Tourre.

Goldman shares fell 10 percent after the SEC announced the suit in a press release Friday morning, according to The Times. The suit itself was brought by the SEC's structured and new products unit, one of the new divisions Khuzami promised to create after his appointment last summer.

The unit's chief, Kenneth Lench, is handling the case for the government along with SEC lawyers Richard Simpson, Reid Muoio, Cheryl Scarboro, James Kidney, Jeffrey Tao, Jason Anthony, Nicole Kelly, and Jeff Leasure.

  • Click here for analysis of the suit from The Am Law Litigation Daily's Susan Beck.

  • Related Stories from ALM and the Web

U.S. Accuses Goldman Sachs of Fraud The New York Times

Goldman Sachs Sued by SEC for Fraud Tied to CDOs Bloomberg

Goldman Sachs Charged with Fraud by SEC Reuters

Goldman Is Charged With Subprime Fraud The Wall Street Journal

Wall St. Bombshell: SEC Accuses Goldman of Fraud on Mortgage Deals Corporate Counsel

Photo: Chip Somodevilla/Getty Images

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