The SEC announced today that it has brought a case against Goldman, Sachs & Co. and one of its vice presidents, Fabrice Tourre, for allegedly “misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter.”
The SEC alleges that Goldman Sachs created a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities. Goldman allegedly failed, however, to disclose to investors “the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.”
The SEC further alleges that hedge fund Paulson & Co. paid Goldman Sachs to structure a transaction in which Paulson & Co. could take short positions against mortgage securities chosen by Paulson & Co. based on a belief that the securities would experience credit events.
