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Wednesday 23rd of June 2010
April 19, 2010    

Bankers shudder at Goldman Sachs’ fraud charge

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by Gill Montia
Bankers shudder at Goldman Sachs' fraud charge

The financial world was in shock over the weekend following the decision of the US Securities and Exchange Commission (SEC) to charge Goldman Sachs and one of its vice presidents with fraud.

The Wall Street bank allegedly sold investors down the river by “misstating and omitting key facts” about a financial product tied to US sub-prime mortgages.

In 2007, the bank produced an investment vehicle known as ABACUS 2007-AC1 and according to the SEC, allowed one of its clients, hedge fund Paulson & Co, to package up the mortgages it contained.

However, the bank failed to disclose to investors the role that Paulson & Co played in the selecting the mortgages, and the fact that the hedge fund stood to make money if the investment vehicle failed, the SEC alleges.

The Commission’s director of enforcement, Robert Khuzami, summed up: “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”

Reports that the Financial Services Authority (FSA) had launched a probe into the London operations of Goldman Sachs were then followed by demands for an investigation, by Prime Minister Gordon Brown.

Appearing on the BBC’s Andrew Marr Show yesterday, Mr Brown declared that the FSA must work with the US regulator to investigate the charges “immediately”.

The Prime Minister also accused the investment bank of “moral bankruptcy” after The Sunday Times revealed that it is proposing to pay £3.5 billion in bonuses worldwide.

The SEC’s action has raised new questions about the US sub-prime mortgage debacle and the extent to which corporate criminals may have been at work; Goldman has responded by calling the charges completely unfounded in law and in fact.

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