SEC accuses Goldman Sachs of fraud

April 17, 2010 at 12:00a.m.

Associated Press

WASHINGTON

The government has accused Goldman Sachs & Co. of defrauding investors by failing to disclose conflicts of interest in mortgage investments it sold as the housing market was collapsing.

The Securities and Exchange Commission said in a civil complaint Friday that Goldman failed to disclose that one of its clients helped create — and then bet against — subprime mortgage securities that Goldman sold to other investors.

The SEC said the fraud, a blow to the reputation of Wall Street’s most powerful firm, was orchestrated in 2007 by a Goldman vice president then in his late 20’s. The employee, Fabrice Tourre, has since been promoted to executive director of Goldman Sachs International in London.

Tourre, the SEC said, boasted to a friend that he was able to put such deals together as the mortgage market was unraveling in early 2007.

In an e-mail to the friend, he described himself as “the fabulous Fab standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!”

A call to a lawyer for Tourre, Pamela Chepiga at Allen & Overy LLP, wasn’t returned.

Two European banks that bought the securities lost nearly $1 billion, the SEC said. The agency is seeking to recoup profits reaped on the deal

Goldman Sachs denied the allegations. In a statement, it called the SEC’s charges “completely unfounded in law and fact” and said it will contest them.

Goldman, founded more than 140 years ago, built a reputation as a trusted adviser to its investment- banking clients. In recent years, it shifted toward taking more risks with its clients’ money and its own. Goldman’s trading allowed the firm to weather the financial crisis better than most other big banks.

It earned a record $4.79 billion in the last quarter of 2009.

The SEC’s enforcement chief said the agency is investigating a wide range of practices related to the crisis. The prospect of possible legal jeopardy for other major financial players roiled the stock market.

Goldman Sachs shares fell more than 12 percent. The Dow Jones industrial average sank more than 110 points in late-day trading.

The charges come as lawmakers seek to crack down on Wall Street practices that helped cause the financial crisis. Among proposals Congress is weighing are tougher rules for complex investments such as those involved in the alleged Goldman fraud.

President Barack Obama vowed Friday to veto a financial-overhaul bill that doesn’t regulate mortgage-backed securities and other so-called derivatives.