SEC Charges Goldman Sachs with Fraud Over ABACUS 2007-AC1 Synthetic CDO Deal Where Hedge Fund Manager John Paulson Selected Mortgage Securities to Bet Against While Goldman Sold Package to Investors, Resulting in $550 Million Settlement but No Criminal Charges

On April 16, 2010, the Securities and Exchange Commission charged Goldman Sachs and Vice President Fabrice Tourre with securities fraud related to ABACUS 2007-AC1, a synthetic collateralized debt obligation (CDO) tied to subprime residential mortgage-backed securities. The SEC alleged that Goldman created and marketed the $2 billion synthetic CDO without disclosing that hedge fund manager John Paulson—who was shorting the housing market and would profit from the CDO’s failure—had played a significant role in selecting the portfolio of mortgage securities underlying the investment. Goldman marketed ABACUS to investors including IKB Deutsche Industriebank and ACA Management as if the portfolio had been selected by an independent manager with aligned interests, when in reality Paulson had deliberately chosen mortgage securities he believed would default. The fraud allowed Paulson’s hedge fund to profit approximately $1 billion when the ABACUS CDO collapsed, while investors who purchased the securities lost virtually their entire investment. The case became the most prominent SEC enforcement action arising from the 2008 financial crisis and exposed the synthetic CDO market’s role in amplifying mortgage fraud and enabling sophisticated investors to profit from the housing collapse.

Fabrice Tourre, the Goldman Sachs vice president who structured the ABACUS deal, became the face of Wall Street excess and fraud through his internal emails, which the SEC made public. In January 2007, Tourre wrote to a friend: “More and more leverage in the system. The whole building is about to collapse anytime now… Only potential survivor, the fabulous Fab[rice Tourre]… standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!” The emails revealed that Tourre and other Goldman executives knew they were creating and selling “monstruosities”—complex derivatives based on deteriorating mortgage securities—while marketing these instruments to unsophisticated investors as sound investments. The “Fabulous Fab” emails demonstrated the contempt that Wall Street traders held for the clients they were defrauding and their awareness that the mortgage securities market was about to collapse, yet they continued structuring and selling toxic deals to maximize short-term bonuses.

On July 15, 2010, Goldman Sachs agreed to pay $550 million to settle the SEC’s charges, which at the time was the largest penalty ever paid by a Wall Street firm to the SEC and one of the largest penalties in SEC history. As part of the settlement, Goldman acknowledged that its marketing materials for ABACUS “were incomplete” and that it was a “mistake” not to disclose Paulson’s role in selecting the mortgage securities portfolio. However, Goldman did not admit to intentional fraud or acknowledge that its employees had deliberately deceived investors. The settlement structure meant that Goldman shareholders—rather than the executives who designed and profited from the ABACUS fraud—bore the financial penalty. Goldman’s $550 million payment represented less than three weeks of the firm’s typical quarterly profits and was dwarfed by the billions in bonuses Goldman had paid to executives during the housing bubble years. The modest penalty relative to Goldman’s profits and the harm caused demonstrated that SEC enforcement functioned as a cost of doing business rather than a meaningful deterrent to securities fraud.

Fabrice Tourre, unlike Goldman Sachs, refused to settle with the SEC and proceeded to trial. In August 2013, a federal jury found Tourre liable for six of seven counts of securities fraud and aiding and abetting securities fraud by Goldman Sachs. The jury determined that Tourre had made material misstatements and omissions in structuring and marketing the ABACUS CDO. However, even after being found liable for securities fraud, Tourre faced no criminal prosecution and received only civil penalties that were minimal compared to his crisis-era compensation. The SEC sought approximately $1 million in penalties and disgorgement from Tourre, a fraction of the bonuses he had earned at Goldman while creating fraudulent synthetic CDOs. In 2014, Tourre enrolled at the University of Chicago to pursue a PhD in economics, demonstrating that even financial professionals found personally liable for securities fraud could continue their careers in finance and academia without criminal records or meaningful professional sanctions.

Despite overwhelming evidence of securities fraud including internal emails showing knowledge of deception, neither Goldman Sachs as an institution nor any of its executives faced criminal prosecution for the ABACUS fraud. The Justice Department conducted no criminal investigation that resulted in charges, even though the same conduct that the SEC found to constitute civil securities fraud would also satisfy elements of criminal securities fraud statutes. The decision not to prosecute criminally occurred during the Obama administration under Attorney General Eric Holder and Criminal Division Chief Lanny Breuer, both of whom came from white-collar defense firm Covington & Burling, which had previously represented major financial institutions. Breuer’s “too big to jail” doctrine—which considered “collateral consequences” to companies and markets when deciding whether to prosecute—effectively meant that Goldman Sachs executives enjoyed immunity from criminal prosecution regardless of fraud evidence, because prosecuting them might harm the institution or broader financial system.

The ABACUS case exposed the much larger synthetic CDO market that had amplified the damage from mortgage fraud and enabled sophisticated investors to place massive bets against the housing market while selling the other side of those bets to unsuspecting investors. Goldman Sachs created at least 47 synthetic CDOs between 2004 and 2007, many of which were specifically designed to allow hedge funds to short the housing market while Goldman sold the other side to institutional investors. These synthetic CDOs did not provide any capital for new mortgages or serve any economic purpose except enabling gambling on mortgage defaults. They magnified losses in the mortgage market because each underlying mortgage could be referenced in multiple synthetic CDOs, meaning that a single mortgage default could trigger losses across dozens of synthetic securities. ProPublica’s investigation revealed that Goldman created at least $39 billion in synthetic CDOs, most of which were designed to fail, allowing Goldman and favored hedge fund clients to profit while institutional investors lost billions.

The SEC’s limited ABACUS enforcement—going after one deal out of dozens of similar fraudulent structures—demonstrated the agency’s capture by the financial industry and unwillingness to pursue systematic fraud investigations. Rather than treating ABACUS as evidence of a pattern requiring comprehensive investigation of Goldman’s entire synthetic CDO business, the SEC treated it as an isolated incident and settled quickly with a financial penalty. The narrow enforcement meant that Goldman faced no requirement to disclose the full scope of its synthetic CDO operations, no obligation to compensate investors in the dozens of other fraudulent deals, and no systemic changes to prevent future similar conduct. The failure to pursue pattern-and-practice investigations revealed that SEC enforcement operated to protect major financial institutions from truly consequential accountability, instead pursuing high-profile individual cases that generated press releases while leaving systematic fraud unpunished.

The ABACUS settlement’s timing and structure suggested political motivations rather than principled enforcement. The SEC filed charges on April 16, 2010, just as Congress was debating the Dodd-Frank financial reform legislation, and settled on July 15, 2010, shortly before the bill’s passage. The high-profile Goldman case gave Congressional Democrats political cover to claim they were holding Wall Street accountable while passing a reform bill that largely preserved the pre-crisis regulatory structure and left major banks intact and even larger. The SEC’s willingness to quickly settle for $550 million—before deposing senior Goldman executives or pursuing broader investigations—suggested that the agency wanted a headline victory rather than comprehensive accountability. The politically convenient timing demonstrated how regulatory enforcement could be weaponized for political theater while avoiding the systemic investigations and criminal prosecutions that would actually deter fraud and hold executives personally accountable.

The Goldman Sachs ABACUS case became emblematic of the two-tier justice system that emerged from the financial crisis: major financial institutions faced modest civil penalties paid by shareholders, while individual executives faced no criminal prosecution regardless of fraud evidence, and low-level employees occasionally served as scapegoats through civil enforcement. The $550 million settlement was large in SEC historical terms but trivial relative to Goldman’s profits, the damage caused by synthetic CDO fraud, and the government support Goldman had received during the crisis including $10 billion in TARP funds and approximately $12.9 billion in AIG counterparty payments. Goldman CEO Lloyd Blankfein, who oversaw the firm during the ABACUS fraud and famously claimed Goldman was “doing God’s work,” faced no personal consequences and continued leading the firm until 2018, when he retired with hundreds of millions in accumulated compensation. The impunity demonstrated that financial executives could engage in securities fraud, profit enormously during boom years, receive taxpayer bailouts during the crisis, and face only modest corporate penalties without any individual criminal or professional accountability.