US authorities have charged Wall Street investment bank Goldman Sachs with fraud in the structuring and marketing of a debt product tied to sub-prime mortgages.
The Securities and Exchange Commission alleged that Goldman structured and marketed a synthetic collateralised debt obligation that hinged on the performance of sub-prime residential mortgage-backed securities, and which cost investors more than $1 billion.
It alleged that Goldman did not tell investors 'vital information' about the CDO, called ABACUS.
This information included the fact that a major hedge fund, Paulson & Co, was involved in choosing which securities would be part of the portfolio, and had taken a short position against the CDO in a bet its value would fall.
According to the SEC complaint, Paulson & Co paid Goldman $15m to structure the CDO, which closed on April 26, 2007. Little more than nine months later, 99% of the portfolio had been downgraded, the SEC said.
The SEC said Goldman vice president Fabrice Tourre was principally responsible for creating ABACUS. It also charged him with fraud.
