SEC Charges Goldman Sachs With Fraud

As the fallout continues from the 2008 sub-prime mortgage meltdown, a stronger, more aggressive SEC is rearing its head. This time, the Division of Enforcement is going after Goldman Sachs. The SEC release says that Goldman Sachs created a financial product that hinged on the performance of residential sub-prime loans. These are the infamous mortgage backed securities that have wreaked havoc on the world economy for the past year or so. Specifically, Goldman failed to tell investors that a major hedge fund had played a role in selecting the debt that was to be packaged in this specific line of CDOs and that the hedge fund held a short position against the CDO.

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

Expect to see more of these actions over time. For more information, see the SEC release here.