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SEC probes second Goldman security: Report

world Updated: Jun 10, 2010 15:31 IST
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The US Securities and Exchange Commission has stepped up its inquiry into a Goldman Sachs' USD 2 billion Hudson Mezzanine collateralised debt obligation sold in 2006, says a media report.

The probe is not part of the civil fraud charges filed against the bank in April, which caused an alleged loss of over USD 1 billion to investors by misrepresenting facts about the financial product tied to sub-prime mortgages.

The SEC interest in Hudson Mezzanine Funding comes amid settlement talks with Goldman over accusations that the bank defrauded investors.

According to the Financial Times, the probe was preliminary and there was no certainty that it would lead to additional action against Goldman.

The report said that in recent weeks the SEC had been gathering information on Hudson Mezzanine, which featured prominently in an 11-hour grilling of Goldman's executives in the US Senate in April.

While the SEC and Goldman declined to comment, the report noted.

The bank created and sold Hudson Mezzanine, which contained residential mortgage-backed securities from its own balance sheet, in late 2006, the daily noted.

The report said that Goldman went "short" on Hudson Mezzanine, buying protection on the entire value of the CDO. Less than 18 months later, as the US housing bubble burst, Hudson Mezzanine's credit rating had plunged to junk status, causing losses for investors and enabling Goldman to collect on the insurance.

Attributing to legal experts, the FT said that inquiries into Hudson Mezzanine were likely to focus on whether Goldman provided investors with adequate disclosure.

In a marketing document, Goldman stated its interests were "aligned" with investors because it would buy equity in the CDO, the report added.