* SEC charges Goldman, vice president on marketing of CDO
* Goldman, facing crisis, says to fight lawsuit
* Paulson not charged
* Shares of Goldman tumble 12.8 percent
(Adds financial and other details, comments)
By Jonathan Stempel and Steve Eder
NEW YORK, April 16 Goldman Sachs Group Inc was
charged with fraud by the U.S. Securities and Exchange
Commission over its marketing of a subprime mortgage product,
igniting a battle between Wall Street's most powerful bank and
the nation's top securities regulator.
The civil lawsuit is the biggest crisis in years for a
company that faced criticism over its pay and business
practices after emerging from the global financial meltdown as
Wall Street's most influential bank.
It may also make it more difficult for the industry to beat
back calls for reform as lawmakers in Washington debate an
overhaul of financial regulations.
Goldman called the lawsuit "completely unfounded," adding,
"We did not structure a portfolio that was designed to lose
The lawsuit puts Goldman Chief Executive Lloyd Blankfein
further on the defensive after he told the federal Financial
Crisis Inquiry Commission in January that the bank packaged
complex debt, while also betting against the debt, because
clients had the appetite.
"We are not a fiduciary," he said.
The case also involves John Paulson, a hedge fund investor
whose firm Paulson & Co made billions of dollars by betting the
nation's housing market would crash. This included an estimated
$1 billion from the transaction detailed in the lawsuit, which
the SEC said cost other investors more than $1 billion. Paulson
was not charged.
Fabrice Tourre, a Goldman vice president whom the SEC said
was mainly responsible for creating the questionable mortgage
product, known as ABACUS, was charged with fraud.
Goldman shares slid 12.8 percent on Friday, closing down
$23.57 at $160.70 on the New York Stock Exchange. The decline
wiped out more than $12 billion of market value, and trading
volume topped 100 million shares, Reuters data show.
The news dragged down broad U.S. equity indexes, which fell
more than 1 percent. The perceived risk of owning Goldman debt,
as measured by credit default swaps, increased. Treasury prices
rose as investors sought safe-haven government debt.
MORE SEVERE THAN EXPECTED
"These charges are far more severe than anyone had
imagined," and suggest Goldman teamed with "the leading
short-seller in the industry to design a portfolio of
securities that would crash," said John Coffee, a securities
law professor at Columbia Law School in New York.
"The greatest penalty for Goldman is not the financial
damages -- Goldman is enormously wealthy -- but the
reputational damage," he said, adding that "it's not
impossible" to contemplate that the case could lead to criminal
charges. Coffee spoke on Reuters Insider.
Goldman vowed to defend itself.
"The SEC's charges are completely unfounded in law and
fact," it said. "We will vigorously contest them and defend the
firm and its reputation."
E-mails from former Washington Mutual Inc CEO Kerry
Killinger read aloud during a congressional hearing this week
illustrated clients' concerns about working with Goldman.
In 2007, Killinger discussed hiring Goldman or another
investment bank to help Washington Mutual find ways to reduce
its credit risk or raise new capital, according to one of the
e-mails, which Michigan Democratic Sen Carl Levin read during
"I don't trust Goldie on this," Levin quoted one of
Killinger's e-mails as saying. "They are smart, but this is
swimming with the sharks. They were shorting mortgages big-time
while they were giving (Countrywide Financial Corp) advice."
The SEC lawsuit announced on Friday concerns ABACUS, a
synthetic collateralized debt obligation that hinged on the
performance of subprime residential mortgage-backed securities,
and which the regulator said Goldman structured and marketed.
According to the SEC, Goldman did not tell investors "vital
information" about ABACUS, including that Paulson & Co was
involved in choosing which securities would be part of the
The SEC also alleged that Paulson took a short position
against the CDO in a bet that its value would fall.
In a statement, Paulson & Co said it did buy credit
protection from Goldman on securities issued in the ABACUS
program, but did not market the product.
Tourre was not immediately available for comment.
Goldman had not disclosed that the SEC was considering a
lawsuit but had known charges were possible and had urged the
SEC not to file them, people familiar with the situation said
on Friday. The sources requested anonymity because the probe
was not public.
To better understand CDOs, the SEC in 2008 approached some
hedge funds, including Paulson & Co, whose investment Paulo
Pellegrini was among those to talk with the regulator.
By betting against subprime mortgage-related debt,
Pellegrini helped Paulson's firm earn an estimated $15 billion
in 2007. Pellegrini last year left to start his own firm.
COMING OUT SWINGING
The lawsuit is a regulatory and public relations nightmare
for Blankfein, who has spent 18 months fending off complaints
that Goldman has been an unfair beneficiary of taxpayer
bailouts of Wall Street.
Blankfein became chief executive less than a year before
the product challenged by the SEC was created.
"This could be the beginning of a period where you have a
regulatory cloud over Goldman Sachs, and perhaps even the
entire investment banking industry," said Hank Smith, chief
investment officer at Haverford Trust Co in Philadelphia.
John Paulson is not related to Henry "Hank" Paulson, who
was Blankfein's predecessor as Goldman chief executive and
later become U.S. Treasury secretary.
The SEC lawsuit represents an aggressive expansion of
regulatory efforts to hold people and companies responsible for
the nation's financial crises.
It could help the regulator rehabilitate its reputation
after missing other high-profile cases, including Bernard
Madoff's Ponzi scheme.
"The SEC has come out swinging," said Cary Leahey, senior
managing director of Decision Economics in New York.
Robert Khuzami, head of the SEC's enforcement division,
said John Paulson was not charged because it was Goldman that
made misrepresentations to investors, not Paulson.
Still, Khuzami called Paulson's firm "a hedge fund that had
a particular interest in the securities performing poorly."