A US watchdog has charged top investment firm Goldman Sachs with fraud over the sale of a complex mortgage product like those blamed for the financial meltdown.
The Securities and Exchange Commission, in a civil suit on Friday, accused Goldman of "defrauding investors by misstating and omitting key facts" about the product that was based on subprime mortgage-backed securities.
The SEC said Goldman failed to tell investors that a major hedge fund which helped put together the so called collateralised debt obligation (CDO), was actually betting against it.
Paulson & Co, one of the world's largest hedge funds, paid Goldman Sachs to structure a transaction in which it could take speculative positions against mortgage securities chosen by the fund, the commission said in a statement.
The deal, which took place at the height of the mortgage crisis in 2007 and as the country was about to fall into a brutal recession, was said to have cost investors around $US1 billion ($A1.07 billion).
The suit also named Fabrice Tourre, a vice-president at Goldman who helped create and sell the product, which caused ordinary investors to lose about $US1 billion.
"The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, SEC's director of the enforcement division in a statement.
"Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party," he said.
Goldman rejected the charges as "completely unfounded in law and fact".
It said it would "vigorously contest them and defend the firm and its reputation".
The authorities have not ruled out the possibility of other investment banks involved in the alleged fraud or other similar types of fraud.
"The SEC continues to investigate the practices of investment banks and others involved in the securitisation of complex financial products tied to the US housing market as it was beginning to show signs of distress," said Kenneth Lench, head of the SEC's structured and new products unit.
When news of the fraud charges hit the market, Goldman's shares fell rapidly, as low as 15 per cent to $US156.60.
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Sounds like Obama is ready to get tough (about time...)
Quote from Obama:
"It has now been well over a year since the near collapse of our entire financial system that cost the nation more than 8 million jobs. To this day, hard-working families struggle to make ends meet.
We've made strides -- businesses are starting to hire, Americans are finding jobs, and neighbors who had given up looking are returning to the job market with new hope. But the flaws in our financial system that led to this crisis remain unresolved.
Wall Street titans still recklessly speculate with borrowed money. Big banks and credit card companies stack the deck to earn millions while far too many middle-class families, who have done everything right, can barely pay their bills or save for a better future.
We cannot delay action any longer.
It is time to hold the big banks accountable to the people they serve, establish the strongest consumer protections in our nation's history -- and ensure that taxpayers will never again be forced to bail out big banks because they are "too big to fail."
That is what Wall Street reform will achieve, why I am so committed to making it happen, and why I'm asking for your help today.
Please stand with me to show your support... by adding your name as a strong supporter of Wall Street reform:
http://my.barackobama.com/StandForWallStreetReform"