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SEC Charges Goldman Sachs With Fraud: Market Drops 125 Points

by Rory Cripps | April 17, 2010 at 10:58 am

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The Securities and Exchange Commission (SEC) charged investment giant Goldman Sachs with fraud on Friday.

The SEC alleges that Goldman failed to disclose information to investors regarding subprime mortgage-backed securities that the company knew would decline in value. As a result, Goldman lost $14.2 billion on Friday and the Dow dropped 125 points.

The fraud allegations focus on how Goldman sold the securities.

The SEC says that Goldman was paid about $15 million in 2007 by Paulson & Co., a hedge fund, to design an investment scheme based on mortgage-backed securities known as synthetic collateralized debt obligations.

The SEC alleges that Goldman failed to disclose to investors that Paulson was also involved in the selection of those securities. Moreover, Goldman mislead investors by telling them that a third party, ACA Management LLC, had selected the pools of subprime mortgages it used to create the securities.

Paulson knew that those securities would decline in value due to the declining mortgage market and had secured insurance against any losses.

When the market plunged, and those that invested lost about $1 billion, Paulson made huge profits.

SEC Enforcement Director Robert Khuzami said in a statement:

"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."

Goldman Sachs called the SEC's fraud allegations "completely unfounded in law and fact".

Friday's stock market drop comes after six straight days of gains that pushed the Dow to its highest close in more than 18 months.

The Dow fell 125.91, or 1.1 percent, to 11,018.66. The Standard & Poor's 500 index dropped 19.54, or 1.6 percent, to 1,192.13, while the Nasdaq composite index fell 34.43, or 1.4 percent, to 2,481.26.

About five stocks fell for every one that rose on the New York Stock Exchange.

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Paul Conneally

at 15:36 on April 17th, 2010

accelerating

to the brow of the hill

a field of rape

Rory Cripps

at 16:15 on April 17th, 2010

Paul: Yes! That is quite the appropriate metaphor for Goldman's actions. I am a capitalist only because capitalism seems to work better than other economic ideologies in providing the masses with a relatively stable lifestyle. Bread and circus tickets and cake too . . . .

Paul Conneally

at 00:53 on April 18th, 2010

Here soon the countryside will be a mass of yellow as the fields of rapeseed come into flower - they are a magnificent sight - 25 years ago there was very little oil seed rape grown but now it seems dominant - beautiful economics - it has brought with it however an acute rise in asthma, hay-fever and sinus problems - production was first of all mass and resulted in adequate but essentially poor quality cooking oils - now the market is developing the equivalent of 'extra virgin olive oil' varieties with high quality oils suitable for fine cuisine - this also has the advantage when substituted (the taste of course is different) for olive oil of produce grown in the UK being used cutting down the imports of olive oil which until the promised climate change kicks in can't be grown here in the UK. Capitalism in action! Nature too.

nanute

at 16:51 on April 17th, 2010

Great post, Rory. I am a proponent of capitalism as well. Unfortunately, what we are witnessing in current times is anything but capitalism. Without transparency and full disclosure in market transactions, capitalism cannot function in a positive manner, and provide a net benefit to society.