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SEC Eyes Other Wall Street Banks After Goldman Fraud Charges

April 19, 2010 8:33 AM EDT
The Securities and Exchange Commission exposed Friday with its civil fraud charges against Goldman Sachs Group Inc. (NYSE: GS) that as the housing market was on the verge of collapse, big banks on Wall Street allowed clients to bet on a drop in real estate.

The SEC is now continuing its investigation into whether other big banks may have arranged mortgage deals to protect key clients, such as hedge funds, as they mislead investors about the severity of the housing market.

While the specific firms that the SEC is investigating are not known, big banks that created mortgage deals that soon went under include UBS AG (NYSE: UBS), Deutsche Bank (NYSE: DB) and Merrill Lynch & Co., which is now owned by Bank of America Corp. (NYSE: BAC).

It will be necessary for the SEC to prove that there was misrepresentation present in deals by major Wall Street firms to mislead investors while allowing others to take advantage.

The agency’s case against Goldman includes an allegation that the firm misled investors by not making public the role that hedge-fund investor John Paulson played a mortgage deal that the firm sold before the downturn in the housing market.

Goldman has defended its actions by saying that it fully disclosed its investments and did not see the need to make the connection to Paulson public.

Investors that bough into the deals lost heavily, while Goldman generated nearly $1 billion in revenue, according to traders cited by the Wall Street Journal.

Similar soured mortgages, nearly led to the collapse of American International Group Inc. (NYSE: AIG), which insured more than $1 billion in bond deals from Wall Street firms that were issued in 2005. AIG needed to be rescued by taxpayer bailout funds to avoid collapse.

Shares of Goldman Sachs fell 12.79 percent on Friday to $160.70 after the news of the civil charges, and have dropped another 1.28 percent to $158.65 in premarket trade on Monday.

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Deutsche Bank, UBS, Paulson & Co. (PCI), Hedge Funds, Goldman Sachs SEC Fraud Case