In a move that has Wall Street riveted, the SEC (SEC news) has sued Goldman Sachs (NYSE: GS) for fraud related to a single synthetic CDO (CDO news), ABACUS 2007-AC1, charging that the firm failed to disclose to investors that its decisions about the specific credit default swaps (CDS news) to include in the portfolio were heavily influenced by a hedge fund (hedge fund news) manager. The fallout was heavy in the media, which provided saturation coverage. While the charge were very specific and limited to a single CDO, the implications are tremendous. This is a momentous event.

The SEC specifically charged Vice President Fabrice Tourre, who was principally responsible for ABACUS 2007-AC1. The hedge fund manager in question was none other than John Paulson (John Paulson news), who was short the CDO and had every reason to want it to tank. The complaint notes that Goldman Sachs' marketing material for the issue--including the term sheet, flip book and offering memorandum for the CDO--all suggested that the portfolio underlying the CDO was selected by ACA Management, a third-party with experience analyzing credit risk in RMB.

You get the feeling that regulators were under pressure to do something to hold firms accountable somewhat for the financial crisis. The SEC's experience with the Bank of America-Merrill Lynch (NYSE: BAC) indictment was tough on it--we've had a lot of hearings, but few indictments. You get the feeling that the SEC is being very cautious, taking on a single CDO issue that it likely thinks is a slam dunk. 

Goldman Sachs released a statement: "The SEC's charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation." One issue if it gets to trial: Will John Paulson actually testify. That would be something. I doubt it will get to that. A settlement is much more likely. In any case, this continues the PR (pr news) nightmare that the company has been enduring. It's more than a dream now. There will be consequences. Few would be surprised if, over time, in a carefully orchestrated way, a change at the top is effected. 

For more:
- here's the release
- here's the complaint
- here's some background about the mortgage operations at Goldman Sachs, where top officials took an interest in the firm's exposure both ways

Related Articles:
Goldman Sachs director implicated in Galleon investigation, will step down from board
Meg Whitman's Goldman Sachs link still questioned
JPMorgan's fixed income performance bodes well for Goldman Sachs
Goldman Sachs executives complain loudly to Harry Reid about Democrats
WaMu execs speak candidly about Goldman Sachs, Lehman Brothers and others