"We were somewhat surprised that this was filed as complaint and no one told us in advance," said David A. Viniar, chief financial officer of Goldman Sachs.
The SEC claims Goldman Sachs sold investors a faulty mortgage product without telling those investors that another client actually helped engineer it to fail, and that he was banking against it. The securities were bundled up and sold to investors, who were told the mortgages had been picked by an independent third party.
The SEC argues that the client, hedge fund chief John Paulson, then made $1 billion as other investors lost more than $1 billion. Goldman Sachs received $15 million for brokering the transaction.
The SEC "charged that Goldman failed to make adequate disclosures on the role that Paulson & Co. played in selecting the portfolio," the SEC's enforcement director Robert Khuzami said on a conference call Monday. Paulson & Co. wasn't charged because the hedge fund did not make representations to investors, the SEC said.
Goldman issued a lengthy statement on its Web site, asserting that its losing $90 million on the deal proves it did not design a ticking time bomb.
"There were also collateral securities that we managed on which we lost money and other aspects of the transaction," Viniar said today. "When you added them all up, the net loss losses to Goldman Sachs were over $100 million."
Goldman has also flatly denied a key point, that Goldman misled ACA Management, the money manager it assigned to the deal. The SEC said Goldman, in arranging for Paulson to assist ACA in selecting the mortgages that went into the deal, told ACA that Paulson would be a long investor, when his intent was to short the deal, in effect betting against it. Goldman said it never told ACA that Paulson would be a long investor.
"We simply do not believe that the evidence cited by the SEC demonstrates that ACA was misled into believing that Paulson was going to be buying an equity position, and the term sheets and offering certainly did not reflect an equity tranche," said Greg Palm, Goldman Sachs' general counsel.
"We would never intentionally mislead anyone," Palm added.
The question, said Wall Street Journal's John Hilsenrath, is whether Goldman Sachs was unfairly favoring one investor group over another.
"It is very complicated," he said on "GMA." "That is why the SEC was split on it."
The one individual singled out in SEC's complaint is 31-year-old vice president Fabrice Tourre. The Stanford-based Frenchman has decided to take time off of work, but he remains on the company's payroll, sources at Goldman Sachs told ABC News.
The SEC alleges that Tourre knew what he was doing wrong, and bragged about it in a 2007 e-mail to a friend.
"More and more leverage in the system, the whole building is about to collapse anytime now," he allegedly wrote. "Only potential survivor, the fabulous Fab ... standing the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!"
In Washington, Democrats are banking on the scandal to support their financial reform bill, opposed unanimously by the GOP. Hilsenrath says Republicans are going to have a tough time arguing against a reform bill in the face of such charges and that more such cases are likely to emerge.