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 reveal that one of its clients helped create — and then bet against — subprime mortgage securities that Goldman sold to other investors.
The name of the collateralized debt obligation at the center of the SEC's allegations is ABACUS 2007-AC1, which the SEC says Goldman created and sold in just as the U.S. housing market was starting to falter.
Florida does not have any investments in any of the Goldman Sachs ABACUS funds, according to Dennis MacKee at the State Board of Administration in Tallahassee.
The SEC said the fraud was orchestrated in 2007 by a Goldman vice president, Fabrice Tourre, now 31, who 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 investment banking clients and for sending top executives into presidential Cabinet posts.
Financial analysts said the charges dealt a setback to the firm's standing.
"It undermines their brand," said Simon Johnson, a professor at the Massachusetts Institute of Technology and a Goldman critic. "It undermines their political clout. I don't think anybody really values being connected to Goldman at this point."
The Goldman client implicated in the fraud is one of the world's largest hedge funds, Paulson & Co.
The SEC said Paulson paid Goldman roughly $15 million in 2007 to devise an investment tied to mortgage-related securities that the hedge fund viewed as likely to decline in value.
Separately, Paulson took out a form of insurance that allowed it to make a huge profit when those securities became nearly worthless.
ABN Amro, a major Dutch bank, was the biggest loser in the securities, having paid Goldman $841 million, according to the SEC. And IKB Deutsche Industriebank AG, a German commercial bank, lost nearly all its $150 million investment, the agency said. Most of the money they lost went to Paulson in a series of transactions between Goldman and the hedge fund, the SEC said.
The SEC is seeking unspecified fines and restitution from Goldman Sachs and Tourre.
The SEC charges come after Goldman Sachs denied last week it bet against clients by selling them mortgage-backed securities while reducing its own exposure to them.