Editors' Note: A previous version of this story contained material similar to text that appeared in other written sources. An Editors' Note was published in the Oct. 31, 2011, Herald. That Editors' Note can be found here.
The Securities and Exchange Commission has charged financial services company Goldman Sachs and one of its vice presidents with fraud, it announced Friday. President Ruth Simmons sits on Goldman's board of directors.
The SEC is accusing Goldman of "defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter," according to the commission's press release.
Simmons wrote in an e-mail to The Herald that it would not be appropriate for her to comment on the situation at this time.
Simmons has been on Goldman's board of directors since 2000, joining the board while president of Smith College. She announced in February that she would not stand for reelection at this May's annual shareholder meeting.
The SEC complaint alleges that Goldman allowed Paulson and Co., a large hedge fund, to "play a significant role in the portfolio selection process" for a collateralized debt obligation, called Abacus 2007-AC1, that Goldman brought to market in early 2007.
The complaint claims that Paulson knew to bet against Abacus, which it helped to form, and therefore had "economic interests directly adverse to investors," but the hedge fund's role in the portfolio selection was not disclosed in Goldman's marketing materials to investors.
According to an SEC press release, Goldman failed to disclose that Abacus was compiled by a hedge fund that stood to gain from defaults on the underlying mortgages.
The SEC said investors in these products may have lost more than a billion dollars.
"The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, director of the SEC's Division of Enforcement, in Friday's release.
"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."
A press release issued by Goldman on Friday called the charges "completely unfounded in law and fact" and promised to "vigorously contest them and defend the firm and its reputation."
