US authorities on Friday accused Goldman Sachs of securities fraud that caused investor losses of more than $1bn, in the toughest regulatory crackdown so far on the excesses of the credit-bubble era.
News of the civil action by the Securities and Exchange Commission wiped more than $12bn off the market value of Wall Street’s most prestigious bank, cast doubt over the future of its leadership team and business model, and rocked other banks.
In the first of a likely series of moves over banks’ action during the financial crisis, the SEC accused Goldman and one of its vice-presidents of failing to disclose that in 2007 the hedge fund Paulson & Co had a major role in creating a collaterised debt obligation, a security backed by subprime mortgages, so that it could bet against it.
Goldman denied the charges and vowed to “vigorously contest them and defend the firm and its reputation”. The bank said it had lost $75m on the deal and denied creating a CDO “designed to lose money”. But news of the SEC charges knocked its shares and intensified speculation over the position of Lloyd Blankfein, its chief executive. The SEC said Goldman’s “senior-level management” approved the CDO but did not name any executives.
Goldman shares closed nearly 13 per cent lower to $160.70.
The civil complaint alleges that Goldman and Fabrice Tourre, one of its vice-presidents, hid from investors the fact that Paulson & Co, which has not been charged, had a heavy hand in influencing the composition of loans that made up the CDO. Mr Tourre could not be reached for comment.
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