Goldman Sachs sued by US regulator for securities fraud

More than a year after Wall Street banks triggered the world's biggest financial crisis, the US government has finally cracked the whip by suing Goldman Sachs, a 139-year old institution for mortgage securities fraud.

Goldman Sachs, in which the Oracle of Omaha, Warren Buffet had had invested $5 billion in September 2008 to restore its shattered confidence during the peak of the global financial crisis, (See: Warren Buffett invests $5 billion in Goldman Sachs)  has been sued by the US Securities and Exchange Commission (SEC) for defrauding investors to the tune of $1 billion in subprime-related financial products.

The SEC alleges that Goldman Sachs created and marketed a synthetic collateralised debt obligation (CDO) called 'Abacus' that hinged on the performance of subprime residential mortgage-backed securities (RMBS).

The 22-page civil suit filed by the SEC filed in a New York Court against Goldman Sachs and one of its employees Fabrice Tourre, the SEC accuses the firm of not disclosing to investors vital information about the CDO, in particular the role played by one of the world's largest hedge funds, Paulson & Co, in the portfolio selection process, where it had taken a short position against the CDO.

Although Paulson has not been named as a defendant in the suit, the SEC alleges that Paulson paid Goldman $15 million to create junk subprime residential mortgage-backed securities (RMBS) to enable it to take short positions against the RMBS.

Goldman, in turn then duped ACA Management (ACA), a third party with expertise in analysing credit risk, into saying that the RMBS were creditworthy so that Golman could offload them on to unsuspecting clients.