The Securities and Exchange Commission said in a civil complaint Friday that Goldman failed to reveal that one of its clients helped create, and then bet against, subprime mortgage securities that Goldman sold to other investors.
The SEC said the fraud, a blow to the reputation of Wall Street's most powerful firm, was orchestrated in 2007 by a Goldman vice president then in his late 20s. The employee, Fabrice Tourre, has since been promoted to executive director of Goldman Sachs International in London.
Tourre, the SEC said, boasted to a friend that he was able to put such deals together as the mortgage market was unraveling in early 2007.
In an e-mail to the friend, he described himself as "the fabulous Fab standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!"
A call to a lawyer for Tourre, Pamela Chepiga at Allen & Overy LLP, wasn't returned.
Two European banks that bought the securities lost nearly $1 billion, the SEC said. The agency is seeking to recoup profits reaped on the deal.
Goldman Sachs denied the allegations. In a statement, it called the SEC's charges "completely unfounded in law and fact" and said it will contest them.
Goldman, founded more than 140 years ago, built a reputation as a trusted adviser to investment banking clients and for sending top executives into presidential Cabinet posts.
In recent years, it shifted toward taking more risks with its clients' money and its own. Goldman's trading allowed the firm to weather the financial crisis better than most other big banks. It earned a record $4.79 billion in the last quarter of 2009.
Financial analysts said the charges dealt a setback to the firm's standing.
"It undermines their brand," said Simon Johnson, a professor at the Massachusetts Institute of Technology. "It undermines their political clout. I don't think anybody really values being connected to Goldman at this point."
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