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Goldman Sachs is accused of fraud Goldman Sachs is accused of fraud
(10 minutes later)
Goldman Sachs has been accused of fraud in a civil suit filed by US financial watchdog, the Securities and Exchange Commission (SEC). Goldman Sachs, the Wall Street powerhouse, has been accused of defrauding investors by America's financial regulator.
It alleges that the bank marketed a complex sub-prime mortgage package but did not reveal that a major hedge fund had bet against the securities. The Securities and Exchange Commission (SEC) alleges that Goldman failed to disclose conflicts of interest.
Goldman's shares fell more than 10% on the news of the accusations against the firm and one of its vice presidents. The claims concern Goldman's marketing of sub-prime mortgage investments just as the US housing market faltered.
The bank escaped relatively unscathed from the financial crisis. Goldman rejected the SEC's allegations, saying that it would "vigorously" defend its reputation.
News that the SEC was pressing civil fraud charges against Goldman and one of its London-based vice presidents, Fabrice Tourre, sent shares in the investment bank tumbling 12%.
The SEC says Goldman failed to disclose "vital information" that one of its clients, Paulson & Co, helped choose which securities were packaged into the mortgage portfolio.
These securities were sold to investors in 2007.
But Goldman did not disclose that Paulson, one of the world's largest hedge funds, had bet that the value of the securities would fall.
The SEC said: "Unbeknownst to investors, Paulson... which was posed to benefit if the [securities] defaulted, played a significant role in selecting which [securities] should make up the portfolio."
"In sum, Goldman Sachs arranged a transaction at Paulson's request in which Paulson heavily influenced the selection of the portfolio to suit its economic interests," said the Commission.
Housing collapse
The SEC alleges that investors in the mortgage securities, packaged into a vehicle called Abacus, lost more than $1bn (£650m) in the US housing collapse.
Mr Tourre was principally behind the creation of Abacus, the SEC said.
Goldman denied any wrongdoing, saying a brief statement: "The SEC's charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation."
Goldman, arguably the world's most prestigious investment bank, had escaped relatively unscathed from the global financial meltdown.
'Regulation risk''Regulation risk'
The SEC said that investors had lost about $1bn (£650m) in the rogue product - known as Abacus.
This is the first time regulators have acted against a Wall Street deal that allegedly helped investors take advantage of the US housing market collapse.This is the first time regulators have acted against a Wall Street deal that allegedly helped investors take advantage of the US housing market collapse.
GOLDMAN SACHS GROUP INC.Last updated: 16 Apr 2010, 17:33 UK *Chart shows local time pricechange%160.33-23.94-12.99 More data on this share price
Goldman did not tell investors "vital information" about the Abacus product, the watchdog said.
That included not revealing that a major hedge fund, Paulson & Co, was involved in choosing which securities would be part of the portfolio, and had bet its value would fall.
Goldman vice president Fabrice Tourre, who the SEC says was principally behind the creation of Abacus, was also charged.
Analyst Matt McCormick of Bahl & Gaynor said that the allegation could "be a fulcrum to push for even tighter regulation".Analyst Matt McCormick of Bahl & Gaynor said that the allegation could "be a fulcrum to push for even tighter regulation".
"Goldman has a fight in front of it," he said."Goldman has a fight in front of it," he said.