Goldman says SEC distorted facts in fraud charges

NEW YORK — Goldman Sachs said Tuesday that the Securities and Exchange Commission misrepresented important facts when it charged last week that the financial services giant had fraudulently sold an investment that was pre-ordained to fail.

"We would never intentionally mislead anyone, and certainly not our clients," general counsel Gregory Palm said in a conference call with Wall Street analysts to discuss the company's first-quarter earnings.

Strong investment banking and trading results helped propel net profit to $3.5 billion in the quarter, up 91% vs. the same period last year, on revenue of $12.8 billion, up 36%.

The results reflect "more signs of growth across the economy," CEO Lloyd Blankfein said. Still, CFO David Viniar said, "The broader economic environment remains fragile."

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But Goldman shares declined 2.1% to $159.98 as investors mulled its growing legal challenges.

Financial regulators in the United Kingdom said they have begun an investigation of Goldman Sachs International, the company's London-based operation. That followed the SEC's civil complaint Friday alleging that Goldman duped ACA Capital and IKB Deutsche Industriebank in 2007. Goldman urged them to invest in a $1 billion security it created that was tied to the value of subprime mortgages.

Unbeknownst to the buyers, the SEC said, the security — a collateralized debt obligation named ABACUS 2007-AC1 — was initiated and partly shaped by hedge fund manager John Paulson, who planned to bet that it would collapse.

A collateralized debt obligation is a contract that enables investors to wager on the future value of certain assets. It does not include the properties themselves.

Still, the ABACUS security became worthless within months as the housing market collapsed.

Palm said ACA and IKB "well understood the risks they were taking." Goldman had hired ACA to pick the mortgages to be referenced in ABACUS, and to insure Goldman if the security lost value.

Palm minimized Paulson's role, saying that "ACA had sole responsibility for determining the final portfolio, and was paid a fee." ACA, Palm added, "rejected more than half of the securities suggested by Paulson."

Goldman denied the SEC's charge that Goldman let ACA believe that Paulson would support ABACUS, not bet that its value would decline.

"We have no idea where ACA got the impression that Paulson was an equity investor," Palm said.

He told analysts that he does not know how the SEC case will unfold, nor how long it will take.

He added that there have been "no conversations whatsoever" with the Justice Department to indicate that it might make criminal charges.