SEC Charges Goldman Sachs With Fraud

Charges related to mortgage markets and "undisclosed" interests that helped hedge fund pocket $1 billion.

More On Legal & Compliance

from The Advisor's Professional Library
  • The Custody Rule and its Ramifications When an RIA takes custody of a client’s funds or securities, risk to that individual increases dramatically. Rule 206(4)-2 under the Investment Advisers Act (better known as the Custody Rule), was passed to protect clients from unscrupulous investors.
  • Recent Changes in the Regulatory Landscape 2011 marked a major shift in the regulatory environment, as the SEC adopted rules for implementing the Dodd-Frank Act.  Many changes to Investment Advisers Act were authorized by Title IV of the Dodd-Frank Act.  
This news article originally appeared on WealthManagerWeb.com on 4/16/2010. The SEC charged Goldman Sachs & Co. (GS&Co), and an employee, Fabrice Tourre, with fraud on April 16, "for making materially misleading statements and omissions in connection with a synthetic collateralized debt obligation ("CDO") GS&Co structured and marketed to investors," according to the SEC complaint. The SEC demanded a jury trial in this case.

The underlying portfolio of securities that backed the synthetic collateralized debt obligation (CDO), named "ABACUS 2007-AC1," was connected to the performance of residential subprime mortgage backed securities (RMBS). The SEC complaint alleges it was not disclosed to investors that "a large hedge fund, Paulson & Co. Inc. ("Paulson"), with economic interests directly adverse to investors in the ABACUS 2007-AC1 CDO, played a significant role in the portfolio selection process."

http://www.sec.gov/litigation/complaints/2010/comp-pr2010-59.pdf

The SEC further alleges that Paulson & Co., Inc., "effectively shorted the portfolio," by creating credit default swaps (CDS), with Goldman Sachs, and that Paulson, because of this "short interest," had "economic incentive" to pick RBMS that it expected would drop in value for the portfolio.

Comments? Please send them to kmcbride@wealthmanagerweb.com. Kate McBride is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.
Reprints Discuss this story
This is where the comments go.