Goldman Sachs charged with fraud

A US watchdog has charged top Wall Street firm Goldman Sachs with financial fraud and raised the prospect of a wider crackdown.

The Securities and Exchange Commission (SEC), in a civil suit, accused Goldman of "defrauding investors by misstating and omitting key facts" about a product based on sub-prime mortgage-backed securities.

The securities were a key contributor to the financial crisis that peaked in 2008 because many contained risky mortgages.

The SEC said Goldman failed to tell investors that a major hedge fund which helped put together the so called collateralised debt obligation (CDO), was at the same time betting against it.

Paulson & Co, one of the world's largest hedge funds, paid Goldman Sachs to structure a transaction in which it could take speculative positions against mortgage securities chosen by the fund, the commission said in a statement.

The deal, which took place during a massive mortgage meltdown in 2007 and as the country was about to fall into a brutal recession, was said to have cost investors about $US1 billion ($A1.07 billion).

Goldman rejects claims

Goldman rejected the charges as "completely unfounded in law and fact".

It said it would "vigorously contest them and defend the firm and its reputation".

The suit also named Fabrice Tourre, then a vice-president at Goldman. He was said to be the creator and salesman of the product.

"The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, SEC's director of the enforcement division in a statement.

Analysts said a long courtroom battle could now be expected.

The charges are believed to be the first to be brought against a Wall Street firm for betting on the collapse of the housing market, which is still struggling to emerge from the crisis.

Underlining persistent concerns about the unfettered trade, US President Barack Obama said on Friday he would veto a Wall Street reform bill that lacked tough rules for complex financial instruments.

"I will veto legislation that does not bring the derivatives market under control and some sort of regulatory framework assures that we don't have the same sort of crisis we have seen in the past," Obama said.

Paulson was not charged because it was not obligated to disclose any conflict of interest to investors, Khuzami said.

"Goldman made representations to investors, and Paulson did not."

Goldman 'made billions' from bets

The firm reportedly made billions of dollars by betting against the housing market in the years before its collapse.

"While Paulson purchased credit protection from Goldman Sachs on securities issued under the (financial product), we were not involved in the marketing of any (its) products to any third parties," the Paulson firm said in a statement.

"Paulson did not sponsor or initiate" Goldman's product, it said.

The authorities have not ruled out the possibility of others involved in the alleged fraud or other similar types of fraud.

"The SEC continues to investigate the practices of investment banks and others involved in the securitisation of complex financial products tied to the US housing market as it was beginning to show signs of distress," said Kenneth Lench, head of the SEC's structured and new products unit.

There are many other investigations involving the sub-prime market and more cases could be expected, said Jacob Frenkel, who spent a decade with SEC enforcement and was a federal prosecutor.

"But, bringing charges and winning cases are two very different things," he cautioned.

Among investors of Goldman's controversial product were German commercial bank IKB.

When news of the fraud charges hit the market, Goldman's shares fell rapidly, as low as 15 per cent to $US156.60.