SEC accuses Goldman Sachs of civil fraud

Two European banks that bought the mortgage securities lost nearly $1 billion,the SEC said. The agency is seeking to recoup profits reaped on the deal

Goldman Sachs denied the allegations. In a statement,it called the SEC’s charges “completely unfounded in law and fact” and said it will contest them.

The charges come as lawmakers seek to crack down on Wall Street practices that helped cause the financial crisis. Among proposals Congress is weighing are tougher rules for complex investments like those involved in the alleged Goldman fraud.

The Goldman client implicated in the fraud is one of the world’s largest hedge funds,Paulson & Co. The SEC said it paid Goldman roughly $15 million in 2007 to put together an investment offering that was tied to mortgage-related securities the hedge fund viewed as likely to decline in value.

Separately,Paulson took out a form of insurance that allowed it to make a huge profit when those securities became nearly worthless.

ABN Amro,a major Dutch bank,was the biggest loser in the securities,having paid Goldman $841 million,according to the SEC. And IKB,a German commercial bank,lost nearly all its $150 million investment,the agency said. Most of the money they lost went to Paulson in a series of transactions between Goldman and the hedge fund,the SEC said.

Goldman Sachs shares fell more than 13 percent after the SEC announcement,which also caused shares of other financial companies to sink. The Dow Jones industrial average fell more than 120 points in midday trading.

The civil lawsuit filed by the SEC in federal court in Manhattan was the government’s most significant legal action related to the mortgage meltdown that ignited the financial crisis and helped plunge the country into recession. The SEC’s enforcement chief said the agency is investigating a broad range of practices related to the crisis.

The agency also charged a Goldman vice president,Fabrice Tourre,31,who it said was principally responsible for devising the deal and marketing the securities. The SEC said he now is executive director of Goldman Sachs International in London.

Tourre,the SEC said,boasted to a friend that he was able to put such deals together as the mortgage market was unraveling in early 2007.

In an email to a friend,he described himself as “the fabulous Fab standing in the middle of all these complex,highly leveraged,exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!”

The SEC is seeking unspecified fines and restitution from Goldman Sachs and Tourre.

Asked why the SEC did not also pursue a case against Paulson,Enforcement Director Robert Khuzami said: “It was Goldman that made the representations to investors. Paulson did not.”

Paulson & Co. is run by John Paulson,who reaped billions by betting against subprime mortgage securities. He is not related to former Treasury Secretary Henry Paulson.

Goldman told investors that a third party,ACA Management LLC,had selected the pools of subprime mortgages it used to create what are known as synthetic collateralized debt obligations. But,the SEC alleges,Goldman misled investors by failing to disclose that Paulson & Co. also played a role in selecting the mortgage pools and stood to profit from their decline in value.