As lawmakers attempt to crack down on the practices of the world's largest financial institutions that led to our current financial crisis, the Security and Exchange Commission has filed fraud charges against Goldman Sachs and it's Vice President Fabrice Tourre. The basis of this case rests on the allegations that Goldman Sachs misled their clients to invest in a mortgage product that was designed to fail. The big question at hand now, is whether this is just the tip of the iceberg and if more charges will be filed against other financial institutions as well.
Renowned hedge fund company, Paulson & Co., was an integral player in developing this subprime product in conjunction with Goldman Sachs. Paulson was granted the opportunity to personally choose the subprime mortgages that would be available in this product, dubbed Abacus. Then, knowing that these mortgages were doomed to fold, Paulson shorted the investment and waited to cash in on their failure.
However, the SEC hasn't filed any fraud charges against Paulson at this point. The reason for Goldman Sachs being targeted for fraud is that they intentionally lied to their investors. Not only did they push a product that they knew would fail, but they advertised it by saying that highly esteemed Paulson was long on the investment, when in reality he was shorting it. More investors were inclined to opt in on the deal, thinking that Paulson was involved. Paulson on the other hand, had no legal obligation to disclose the conflict of interest to the investors.
Only a week before these charges were filed, Goldman Sachs issued its annual shareholder letter which denied any claims that they had bet against their own clients or profited from the housing collapse. They claimed that any short bets that were placed were merely a security move to balance out their long bets.
Goldman Sachs fervently denies these claims saying that the charges have no basis and they will "vigorously contest" the SEC's charges. On the other side of the coin, the SEC isn't willing to make any comments out of concern that it could compromise their ongoing investigation of Goldman Sachs.
While these are merely the facts surrounding the basis of these charges, the widespread damage of this fraud is not yet known. It's estimated that Goldman Sachs investors have lost over a billion dollars (while Paulson pocketed one billion), though no concrete number has been established at this point. As a Bellevue personal injury lawyer, I regularly aid the victims of accidents who has suffered broken bones or spinal cord trauma. However, the majority of those injuries eventually heal. The victims of the Goldman Sachs fraud will suffer lifelong hardship that may never be repaired. Many of the investors have lost retirement funds that they've been saving for their whole lives. The emotional and financial strain that they are now forced to face for their remaining lifetime is worse than any physical injury.
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