The SEC alleges that Goldman Sachs purposely misled investors into buying a mortgage-backed security that it knew was destined to fail.
Goldman let Paulson & Co., one of the world’s largest hedge funds, choose which investments to include in the portfolio, knowing that Paulson was betting against it. It did not disclose to investors that Paulson influenced the selection process – and when it crashed, Paulson made $1 billion from investors, while Goldman raked in the fee money.
“In sum, [Goldman Sachs] arranged a transaction at Paulson’s request in which Paulson heavily influenced the selection of the portfolio to suit its economic interests, but failed to disclose to investors, as part of the description of the portfolio selection process contained in the marketing materials used to promote the transaction, Paulson’s role in the portfolio selection process or its adverse economic interests,” reads the SEC’s complaint.
As of Sunday night, two members of Congress and British Prime Minister Gordon Brown have called for investigations into the bank’s role in the 2008 subprime mortgage meltdown. Germany has also considered taking legal action against Goldman, according to the New York Times.