Goldman Sachs | Charged by the SEC for fraud

Friday, April 16th, 2010 By

Goldman Sachs tower in New York City

The SEC today announced that Goldman Sachs would be prosecuted for their part in the mortgage crisis. Image from Flickr.

This morning, the Securities and Exchange Commission brought charges up against Goldman Sachs for fraud. The SEC alleges that Goldman Sachs defrauded investors by “misstating and omitting key facts.” The SEC suit against Goldman Sachs is an outgrowth of the investigation into the collapse of the U.S. housing market, urged on by unsecured loans at all levels of the financial system.

The SEC suit against Goldman Sachs

The downfall of the housing market and much of the associated U.S. economy is the “fault” of many different entities such as Goldman Sachs. Specifically, the SEC is alleging that Goldman Sachs had a cut-and-dry conflict of interest that they lied about. Specifically, Goldman Sachs allowed a hedge fund that was making bets on mortgages to have a say in the “quality” of those mortgages. Goldman Sachs then told investors that an independent third party had verified the quality of these investments.

Goldman Sachs responds to the SEC filing

At the same time that the Securities and Exchange Commission filed its  suit against Goldman Sachs, Goldman Sachs released a response. The response was all of one sentence:

The SEC’s charges are completely unfounded in law and fact, and we will vigorously contest them and defend the firm and its reputation.

The products Goldman Sachs was selling

The basis of the SEC filing against Goldman Sachs is a product called Collatoralized Debt Obligations, or CDO. A Collateralized Debt Obligation is simply a group of mortgages. Once a homeowner gets a mortgage, the bank bundled it up with lots of other mortgages, and sold that bundle. Because the homes acted as collateral, many banks and investment firms saw these CDO products as safe investments. The idea is that payments on the mortgages would continue to come in, and the investment firm would make money. What many banks – like Goldman Sachs – did not tell investors is that these mortgages were not all good. In fact, many of these home loans were practically payday loans – given with no credit check and no certainty that the mortgage would actually be paid.

The specifics of the Goldman Sachs CDO

The debt obligation that the SEC filing against Goldman Sachs is based on is the ABACUS CDO. Goldman Sachs bundled up all these bad mortgages, known as Residential Mortgage Backed Securities, or RMBS. Goldman Sachs then asked ACA Management LLC to analyze how risky the investment might be. What Goldman Sachs did not tell ACA Management or investors was that these mortgages had been selected by a group of people who had taken out a bet that the mortgages would fail. In other words, investors bet that the mortgages would fail, then selected mortgages they knew would fail. When Goldman Sachs sold these mortgages in groups, the company didn’t tell investors that huge bets had been taken out against the mortgages. To put it simply, Goldman Sachs knew that this was a bad investment and didn’t say a thing about it.

Find out more about the Goldman Sachs inside job

A great resource to find out more about how these financial products work and how some companies made billions of dollars off the housing collapse is the This American Life episode Inside Job


Securities and Exchange Commission

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This post has 2 comments

  1. greg says:

    I am presently in litigation with Fremont Reorganizing, Goldman Sachs dba Litton Loan Servicing, et al., (2 different cases) for about 2 years now. The main issue with the complaint is a fraudulent loan originated by Fremont in June 2006. This in turn produced an array of other

    issues: unsigned deed of trust, over billing issues, lost payments, excessive balloon payment, back dated assignments, illegal non-judicial foreclosure documentation, missing documentation, illegally reporting to my credit, falsifying declarations, 6 week TRO's, court procedures not followed, judges wait until the courtroom is cleared to rule against a TRO (both times); retired (78 year old) judge ruled against a seated judges TRO where the retired judge took 30 minutes to read a 300 page brief. The whole time they have been ignoring my request and failing to give me the required documentation so that I can rescind the loan. Goldman Sachs dba Litton Loan Servicing has been aggressively trying to foreclose on my property. I believe to cash out for insurance reasons. (It's over a million dollar loan) I have invested over $400,000 into this property for the past 5 years and if I had known about this mortgage meltdown game played by Wall Street I would have never proceeded with this Real Estate transaction. The Media and the Government has not once addressed or helped the borrower, namely me, who also has been damaged by these defaulted CDO's.

    A Time line of what's going on with Goldman Sachs to show how they are scheming to pursue foreclosures for the insurance by acquiring distressed, shelled fraudulent companies which will eventually or haven't already gone BK…

     Oct 26, 2005 Litton Loan Servicing Class Action – mishandling loans, servicing over 400,000 borrowers – case settled Feb 17, 2009 for $537 (limited due to class status)

     Feb 27, 2007 FDIC Cease and Desist – Fremont Reorganizing for illegal loan practices, et al., (largest predatory lenders who heavily solicited brokers for their schemes)

     Oct 16, 2007 Massachusetts Lawsuit vs Fremont and Goldman Sachs – Predatory Lending Practices – settled May 11, 2009 for $60 mil

     Dec 11, 2007 – Goldman Sachs Acquires Litton Loan Servicing

     June 2, 2008 Litton (Goldman Sachs) Acquires Fremont Reorganizing Servicing Rights

     June 19, 2008 Fremont Reorganizing files BK

     Apr 16, 2010 – SEC vs Goldman Sachs – Securities Fraud

    Note: My wife is pursuing individuals who are interested in joining her in a class action lawsuit with regards to violation of her community property rights in a wrongful foreclosure. If you are in a community property state and a spouse is not on title you may have grounds for legal action.

  2. Jeff from Miami Limo says:

    It makes me sick that these people got away with scaming so many people. I hope they get convictions, and those convictions lead to changes that make sure this type of thing never happens again.

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