The SEC says Goldman Sachs defrauded investors in a CDO, one of those complicated bonds that lost huge amounts of value when the housing market went bust.
The problem isn't that this CDO lost value. It's that a hedge fund played a role in choosing what went into the CDO, then bet against it — and Goldman didn't tell people who invested in the CDO about the hedge fund's role, according to the SEC.
In a statement, Goldman said the "SEC's charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation."
Here's the story the SEC lays out in a complaint filed in federal court:
A big hedge fund, Paulson & Co., wanted to bet against the housing market. It talked to Goldman about putting together a CDO full of mortgage-related assets that Paulson thought were likely to lose value. Paulson's plan was to bet against the CDO, so it would profit if the CDO lost value.
But Goldman "knew that it would be difficult, if not impossible" to sell the CDO if investors knew that a hedge fund played a "significant role" in deciding what went into the CDO, then bet against it, according to the SEC.
So Goldman brought in another company, called ACA Management, which was in the business of selecting assets for CDOs. Goldman "misled ACA into believing that Paulson was investing" in the CDO, rather than betting against it, according to the SEC. Paulson worked with ACA to determine what went into the CDO.
Goldman sold slices of the CDO to investors. In its marketing materials, Goldman said the assets in the CDO were "selected by ACA." The marketing materials didn't mention Paulson.
Paulson paid Goldman $15 million for putting the CDO together.
Investors in the CDO lost over $1 billion. Paulson bet against the CDO and made a profit of $1 billion, the SEC says.
The lawsuit accuses Goldman Sachs and a Goldman VP of "making materially misleading statements and omissions." (Paulson, which is not named in the lawsuit, is not connected to former Treasury Secretary Henry Paulson.)
For more, read coverage from the New York Times, which wrote back in December about Goldman's involvement in this sort of thing.
And read up on Magnetar, another hedge fund that profited by betting against CDOs — and was the subject of a recent collaboration between ProPublica, This American Life and Planet Money.