The suit is connected to a collaterised debt obligation (CDO) sold to Goldman investors, known as Abacus-2007 AC1.
The bank told its clients that a third party, ACA Management, had selected the securities that formed the CDO. However, the SEC alleges that the hedge fund Paulson & Co also played a part in choosing which securities were picked. It is this omission that the SEC is investigating, as Paulson & Co made billions during the crisis betting against subprime mortgages.
The hedge fund purchased insurance in the form of credit default swaps against the default of the CDO - effectively betting against it - and the SEC claims that these derivatives gave the hedge fund an incentive to select mortgage-backed securities that would default.
By January 2008, 99% of the portfolio had been downgraded by credit rating agencies but Paulson & Co had earned about $1bn in profits from the deal. Goldman Sachs was paid $15m to arrange the deal but lost $90m on its position while the buyers lost their total investment.
Goldman Sachs has denied all charges and will "vigorously contest them and defend the firm and its reputation". A statement from Goldman Sachs said: "Any investor losses result from the overall negative performance of the entire sector, not because of which particular securities ended in the reference portfolio or how they were selected."
The case is the first to have been brought by the SEC's newly formed structured products group.
