The SEC’s case against Goldman Sachs

SEC’s case against Goldman The Securities and Exchange Commission alleged that Goldman, Sachs & Co., with the help of hedge fund king John Paulson, created risky mortgage-backed securities that the firm then sold to clients. Here is how it worked, according to the SEC’s complaint: * In April 2007, as the mortgage market was collapsing, Goldman created ABACUS 2007-AC1, a security based on the value of subprime mortgages. * One of Goldman’s vice presidents, Fabrice Tourre, let Paulson decide which mortgages were bundled into ABACUS. Paulson, who was betting on the failure of the mortgage market, deliberately chose low-quality mortgages that were likely to fail, the SEC alleges. * Goldman sold ABACUS to investors, mostly European banks, without revealing Paulson’s role. Instead Goldman said an “independent third party” -- ACA Management -- had chosen the portfolio. * Within a year, most of the mortgages included in ABACUS were heading toward foreclosure, and with them ABACUS’ value. * Investors who bought the securities lost $1 billion. Paulson made $1 billion. Goldman earned $15 million for creating ABACUS. Sources: SEC complaint, Times research