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By Jeremy Glaser | 04-16-2010 12:27 PM

What the Fraud Charge Means for Goldman

Morningstar analyst Michael Wong is holding his Goldman fair value steady for now, but says SEC charges could harm the firm in three ways.

Jeremy Glaser: For, I'm Jeremy Glaser. The SEC filed a civil fraud suit against Goldman Sachs today, sending shares tumbling. I'm here with Goldman analyst Michael Wong to see exactly what this suit is about, and if it has the possibility of becoming a deepening crisis.

Michael, thanks for joining me today.

Michael Wong: Always great to be here.

Glaser: So first off, what were the details of this particular fraud investigation, or the fraud suit, that the SEC brought?

Wong: The fraud suit is a civil law suit. It's about Goldman supposedly misstating or omitting key information about a CDO, collateralized debt obligation, that it marketed. Paulson & Co., a very large hedge fund, had a part in selecting some of the securities in this portfolio that goes into the CDO. And that Paulson was actually shorting, expecting the CDO to fail, while Goldman was marketing it to long buyers.

Glaser: So it's a pretty limited suit. It's really based on just this one particular CDO, and not on the firm's entire operations, or anything like that?

Wong: That's where it's currently contained, but there is a chance that, while investigating this, they could unearth a broader range of supposedly somewhat fraudulent activities. And if that happens, Goldman could be inundated with additional lawsuits of some kind or additional SEC charges.

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