The S.E.C Sues Goldman Sachs For Fraud

The New York Times reports that the Securities and Exchange Commission has filed a lawsuit against Goldman Sachs for securities fraud over actions taken by the bank during the mortgage meltdown.

The lawsuit alleges that in February of 2007, Goldman Sachs created a financial instrument known as Abacus 2007-AC1, along with 25 other similar instruments,  that allowed  the bank and a few investors to wager against the housing market.

Specifically, this instrument was created at the behest of hedge fund manager, John A. Paulson, who had earned billions of dollars in 2007 by correctly guessing that the housing market would crash. While Goldman was telling the investors to whom it sold shares in Abacus that their investments were sound and that they were picked by  an “independent manager,” it had allowed Paulson to choose which bonds would go into Abacus. Paulson, of course, chose the weakest bonds that would certainly fail. Goldman and the other investors who bet against the housing market made billions while the investors that bought into Abacus lost billions, $10.9 billion, to be exact.

Although the mechanics of the matter are complex and hard to understand, the fraud here is very basic. Goldman represented that the shares in Abacus were sound when it knew in fact they weren’t and made money because of this fact.

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