The legal fall-out from the international banking crisis stepped up a notch on Friday 16 April when the US Securities and Exchange Commission (SEC) charged Wall Street investment bank Goldman Sachs and one of its vice presidents for defrauding investors.
As the SEC release explained, the SEC alleged that Goldman Sachs failed to disclose to investors that Paulson & Co, a leading hedge fund, played a major part in selecting a portfolio of subprime residential mortgage-backed securities (RMBS) that underpinned a Goldman Sachs collateralised debt obligation.
The SEC charge alleged that Paulson & Co paid Goldman Sachs approximately $15m for structuring and marketing the CDO, against which it had taken up a short position. When the values of the assets were downgraded, investors – including the nationalised Royal Bank of Scotland - are alleged to have lost more than $1bn.
“The product was new and complex but the deception and conflicts are old and simple,” said Robert Khuzami, Director of the SEC’s enforcement division. “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.”
Goldman Sachs vice president Fabrice Tourre was named in the camplaint as the executive responsible for structuring and marketing the transaction. While aware of Paulson’s influence, he misled the consultants hired to put together the portfolio that Paulson & Co had invested $200m in the CDOs, when the hedge fund was betting against them.
The US regulator’s action will add weight to the growing body of opinion that the international banking collapse will ultimately land in the laps of the banks’ auditors. Already, a US district court report has highlighted “accounting gimmicks” at Lehman Brothers that were passed by its auditor Ernst & Young.
PricewaterhouseCoopers (PwC) was not implicated in the SEC complaint relating to the dodgy Goldman Sachs CDO, but now the SEC has pounced other litigants are likely to follow suit. The UK’s Financial Services Authority, for example, announced that it was conducting a preliminary investigation to establish if there were implications for UK-regulated subsidiaries of Goldman Sachs.
Each new plaintiff will look for evidence of wrongdoing, and ask whether or not the bank’s auditors should have known about it or done something about it. In her re:theauditors blog, Big Four critic Francine McKenna has been raising pointed questions about PwC’s role as auditor for both Goldman Sachs and the crippled insurance group AIG, which underwrote many of the bank’s subprime mortgage assets.
Blogger Edith Orenstein commented on our sister site AccountingWEB.com that Rolling Stone magazine had dubbed Goldman Sachs the “giant vampire squid”; the danger here for PwC is that it too could find itself caught up in the legal net closing in on its client.
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John Stokdyk sadly passed away in June 2023. He had been with the site since 1999, rising from news editor to editor in chief, global editor and head of insight. As a roving editor, he investigated the profession's use of technology around the world. He devoted his spare time to technology history and an oddball collection of stringed...