SEC Charges Goldman With Civil Fraud

The SEC says the Goldman Sachs CDO at the center of its complaint cost investors about $1 billion in losses.

Image: Reuters

It looks like the government is ready to put a stake into the heart of the vampire squid.

The SEC has filed civil fraud charges against Goldman Sachs, citing its marketing of CDOs, or collateralized debt obligations. CDOs were at the heart of the financial crisis, losing massive amounts of value at a rapid pace. In this case, the Goldman CDO was tied to the subprime mortgage market.

The bank, characterized last summer by journalist Mike Taibbi as a "great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money," allegedly allowed hedge fund Paulson & Co. to help design the CDO. The hedge fund then bet against the CDO, a fact that the bank failed to disclose to its customers, according to the SEC. It was vice president Fabrice Tourre who was primarily responsible for the CDO, known as ABACUS. Losses tied to the product are in the range of $1 billion, according to the SEC. The product was launched in the spring of 2007, after the first signs of trouble in the subprime mortgage market had appeared, but long before the extend of the crisis was widely understood.

"The product was new and complex, but the deception and conflicts are old and simple," Robert Khuzami, the SEC's director of enforcement, said in a statement. "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."

Goldman shares fell on the news, declining $15.81, or 8.58 percent, to $168.46. The company had no immediate comment, although it promised to respond to an inquiry.

The civil fraud charges reflect a major escalation of the government's crackdown on Wall Street, which so far has consisted of efforts to control compensation. But the nature of the civil charges raise a question asked by Portfolio.com columnist Gary Weiss. If the fraud in financial cases is so serious, why are government regulators so reluctant to bring criminal charges?