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Goldman Sachs to settle fraud case but denies wrongdoing.

15 July, 2010

WASHINGTON – Goldman Sachs & Co. has agreed to pay $550 million to settle civil fraud charges that the Wall Street giant misled buyers of mortgage-related investments.  AP via Yahoo

According to the story

The penalty was the largest against a financial company in SEC history. [ however] The settlement amounts to less than 5 percent of Goldman’s 2009 net income of $12.2 billion after payment of dividends to preferred shareholders — or a little more than two weeks of net income.

However what I find most interesting is the fact that [John] Paulson & Co. is said to have profited from the alleged “fraud,” but was not charged by the SEC. Why?

The securities cost investors close to $1 billion while helping Goldman client Paulson & Co. capitalize on the housing bust, the SEC said in the charges filed on April 16.

Bloomberg Businessweek, reports this response from GS.

“It was a mistake for the Goldman marketing materials to state that the reference portfolio was ‘selected by’ ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process,” the SEC’s statement quoted Goldman Sachs as saying in settlement documents.

A mistake? How does the word “mistake” even apply here?  I make a mistake writing in my blog, I hit the backspace key (or let Google correct it), but Goldman Sachs was at the top of  a giant “Ponzi scheme” that brought about an economic collapse in the U.S. and in countries throughout the world. MISTAKE hardly seems to cover it and certainly forfeiting two weeks’ worth of profit hardly seems a fitting response to this mistake either.

According to Wikipedia,

The allegation was that Goldman Sachs misrepresented to investors that an objective third party (ACA Management) had assembled the mortgage package underlying the CDOs when, in fact, Paulson & Co., with economic interests directly adverse to investors, had a major role in assembling the mortgage package.[18]

As a counterparty in the CDO transaction, Paulson & Co. stood to reap great financial benefit in the event of default. (It’s alleged that Paulson selected a portfolio of CDOs that were likely to default, against which Paulson & Co. had already sold short or would sell short.

So, how does any client trust company like Goldman Sachs when it “misrepresents” its product to investors so that a party to the “investment” is betting that such investment will fail.

And why was Paulson & Co. not charged in this scheme?  The company was certainly involved in selecting the alleged “investments.”  Shouldn’t that count for something?

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