News Staff

Date: Fri. Apr. 16 2010 9:24 PM ET

Investment giant Goldman Sachs & Co. has been accused of fraudulent activities, with the U.S. Security and Exchange Commission alleging the firm failed to reveal it was selling a subprime mortgage-related product designed by a company that positioned itself to profit from that market's collapse.

On Friday, the SEC said Goldman Sachs created a "synthetic collateralized debt obligation" that depended on a healthy performance from investments in the subprime mortgage market. The investment firm marketed the product in early 2007, just as the U.S. housing market and its related securities began to collapse.

BNN's Michael Hainsworth said the product in question -- a known as ABACUS 2007-AC1 -- was essentially a compendium of selected subprime mortgage investments that were bundled together.

"What the Securities and Exchange Commission is alleging is that Goldman Sachs sat down with a company -- a hedge fund company named Paulson & Co. -- and Paulson helped them decide which investments would go into this large basket," Hainsworth told CTV News Channel on Friday.

"And all the while, Paulson was betting against the contents of that basket. So, when Wall Street realized that maybe these investments weren't as strong as we thought they were, maybe we should sell them, Paulson benefited the more they sold."

As a result, it is the SEC's suggestion that the companies were "profiting from the collapse of the stock market and the creation of the worst financial crisis since the Great Depression."

Paulson & Co. paid Goldman Sachs US$15 million to do the deal, the SEC said, which it agreed to on April 26, 2007. The sale price included creating and marketing the ABACUS product.

Nearly six months later, 83 per cent of the residential mortgage-backed securities that were included in ABACUS had been downgraded, according to the SEC. By January 29, 2008, about 99 per cent of the portfolio had eroded. The SEC said investors lost at least US$1 billion through buying the ABACUS product.

The SEC filed civil fraud charges against the well-known investment firm in a Manhattan court on Friday, as well as against 31-year-old Goldman Sachs Vice President Fabrice Tourre, whom the Wall Street watchdog says was "principally responsible" for the sale of the product in question.

"The product was new and complex but the deception and conflicts are old and simple," Robert Khuzami, the SEC Director of the Division of Enforcement said in a statement released Friday.

"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."

It is seeking unspecified fines and restitutions from both the company and its accused vice-president.

In response, the investment bank released a statement saying "the SEC's charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation."

According to court records, Tourre is currently the executive director of Goldman Sachs International. He works in London.

Hainsworth said Goldman Sachs "has been hit pretty hard" by the SEC's allegations, seeing an 11 per cent drop in its stock value by midday trading on Friday.

Investors were also pulling out of the broader market Friday morning, which suggested they may be concerned that "there may be more cockroaches under the refrigerator here as the SEC moves it away," Hainsworth said.

Instead, investors bought heavily in the U.S. dollar, which pushed the value of the Canadian loonie down to about 98.49 cents US, just below parity in the early afternoon.

With files from The Associated Press