Wall Street giant fraud row

WallStreet giant Goldman Sachs has been accused by the US government's financial watchdog of defrauding investors by failing to disclose conflicts of interest in mortgage investments it sold as the housing market was faltering.

The Securities and Exchange Commission in the US yesterday announced civil fraud charges against the company and one of its vice presidents.

The SEC alleges Goldman failed to disclose that one of its clients helped create – and then bet against – sub-prime mortgage securities that Goldman sold to investors.

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Investors in the mortgage securities are also alleged to have lost more than a billion dollars, said Commission officials. The SEC is seeking to recoup profits from the deal.

The Goldman client implicated in the fraud is one of the world's

largest hedge funds, Paulson, which paid Goldman roughly $15m for structuring the deals in 2007.

Goldman Sachs shares fell more than 12 per cent after the SEC announcement, which also caused shares of other financial companies to sink.

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The civil lawsuit filed by the SEC in federal court in Manhattan was the US government's most significant legal action related to the mortgage meltdown that ignited the financial crisis and helped plunge the country into recession.

The SEC also charged Goldman vice president, Fabrice Tourre, 31, whom it said was principally responsible for devising the deal and marketing the securities.

The Commission is seeking unspecified fines and restitution from both.

Goldman told investors that a third party, ACA Management LLC, had selected the underlying mortgages in the investment. But the SEC alleges Goldman misled investors by failing to disclose that Paulson also played a role in selecting the mortgages and stood to profit from their decline in value.

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