SEC Charges Goldman Sachs With Fraud: Market Drops 125 Points
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.
Most Recommended Comment
New York, United States