US market regulator SEC on Friday charged investment banking major Goldman Sachs with defrauding and causing an alleged loss of over $ 1 billion to investors by misrepresenting facts about a financial product tied to sub-prime mortgages.
The Securities and Exchange Commission (SEC) said charges have been made for "defrauding investors by misstating and omitting key facts about a financial product tied to sub-prime mortgages as the US housing market was beginning to falter".
Sub-prime mortgages, where chances of defaults are high, were one of primary causes for the global financial crisis.
Investment banking giant Goldman Sachs has an annual revenue of more than $ 50 billion.
Going by the complaint, Goldman Sachs marketed a collateralised debt obligation (CDO), whose fortunes hinged on the performance of sub-prime residential mortgage-backed securities (RMBS).
The investment major failed to disclose vital information about the CDO, especially the role of a major hedge fund player in the portfolio selection, an SEC statement said. One of the world's largest hedge funds Paulson & Co paid Goldman Sachs to structure a transaction, it added.
Interestingly, excessive issuing of CDOs, a complex instrument, was also blamed for the financial meltdown.
SEC is seeking "injunctive relief, disgorgement of profits, prejudgement of interest and financial penalties". A Goldman Sachs VP has also been slapped with fraud charges.
Shares of Goldman Sachs plunged 11.36 per cent to $ 163.08 in early trading on the New York Stock Exchange.
"The product was new and complex but the deception and conflicts are old and simple," SEC's Director (Division of Enforcement) Robert Khuzami said.
"The marketing materials for the CDO known as ABACUS 2007-AC1 (ABACUS) all represented that the RMBS portfolio underlying the CDO was selected by ACA Management LLC, a third party with expertise in analysing credit risk in RMBS."
SEC alleged that undisclosed in the marketing materials was that Paulson, which was poised to benefit if the RMBS defaulted, played a significant role in selecting which RMBS should make up the portfolio.
"Goldman Sachs did not disclose Paulson & Co's short position or its role in the collateral selection process...or other marketing materials provided to investors," it added.
Goldman VP Fabrice Tourre, responsible for ABACUS 2007-AC1, allegedly knew of Paulson's undisclosed interest.
"Investors in the liabilities of ABACUS are alleged to have lost more than $ 1 billion," SEC said. The deal closed on April 26, 2007, and Paulson paid Goldman about $ 15 million for structuring and marketing ABACUS.