As you may have heard, Goldman Sachs is being sued for fraud by the Securities and Exchange Commission for allegedly misleading investors about a deal that Goldman helped structure and sell. In the civil suit, the SEC specifically faulted Goldman for failing to disclose that a hedge fund was helping create the investment while betting big the deal would fail. 
 
 According to the SEC, Goldman Sachs knew about the hedge fund’s bets, knew it played a significant role in choosing the assets in the portfolio, and yet did not tell investors about it. (Goldman Sachs has called the SEC’s accusations “completely unfounded in law and fact.” And in another more detailed statement, it said it “did not structure a portfolio that was designed to lose money.”) 
 
 As we reported at ProPublica last week, many other major investment banks were doing a similar thing. 
 
 Investment banks including JPMorgan Chase, Merrill Lynch (now part of Bank of America), Citigroup, Deutsche Bank and UBS also created CDOs that a hedge fund named Magnetar was both helping create and betting would fail. (Update 4/17: Magnetar denies it was making such bets.) Those investment banks marketed and sold the CDOs to investors without disclosing Magnetar’s role or the hedge fund’s interests. 
 
 Here is a list of the banks that were involved in Magnetar deals, along with links to many of the prospectuses on the deals, which skip over Magnetar’s role. In all, investment banks created at least 30 CDOs with Magnetar, worth roughly $40 billion overall. Goldman’s 25 Abacus CDOs—one of which is the basis of the SEC’s lawsuit—amounted to $10.9 billion. 
 
 Our reporter Jake Bernstein explained the investment banks’ disclosure failures on Chicago Public Radio’s “This American Life”: 
 
 The role of Magnetar, both as equity investor and in their bets against the very CDOs they helped create, were not disclosed in any way to investors in the written documents about the deals. Not the marketing materials, not the prospectuses, not in the hundreds of pages that an investor could get to see information about the deal was it disclosed that it was in fact Magnetar who’d helped create the deal, and who’d bet against. 
 
 That is, of course, along the lines of what the SEC is suing Goldman Sachs for now. The SEC’s suit also says CDOs like the ones Goldman built “contributed to the recent financial crisis by magnifying losses associated with the downturn in the United States housing market.” 
 
 Notably, the SEC did not sue the hedge fund involved in Goldman’s Abacus deals—Paulson & Co.—or its manager, John Paulson. Instead, it’s going after Goldman. And as we pointed out in our reporting, there’s no evidence that what Magentar did was illegal. 
 
 We’ve called the major banks involved in Magnetar CDO deals to see if they were concerned about similar lawsuits. Thus far, Bank of America, Citigroup, Deutsche, Wells Fargo (which bought Wachovia) and UBS have responded and have all declined our requests for comment. Here is Magnetar’s response to our original reporting. 
 
 Read ProPublica’s full Magnetar story. 
 
 ProPublica’s Ryan Knutson contributed to this report. ||||| For months, Goldman Sachs and the Securities and Exchange Commission had been involved in secret talks over allegations that the Wall Street bank defrauded customers in selling them investments designed to fail. 
 
 Then, after a crucial meeting last month between lawyers for Goldman and the SEC, the agency came to a fork in the road. Even after SEC lawyers had told Goldman in writing they were prepared to file a federal suit, the firm gave no ground, declining to ask for a settlement, according to three people familiar with the case. The agency could prolong negotiations in hopes of reaching a deal Goldman would accept, as the SEC had often done in previous cases, or take the bank to court. 
 
 Endorsing the recommendation of investigators, the SEC's five-member commission voted 3 to 2 to proceed with the civil suit, taking a high-stakes gamble that pits Wall Street's top regulator against its most storied bank. The case, filed Friday, 
 
 has provoked a counteroffensive from Goldman, which says it was blindsided by the suit. Goldman's defenders are suggesting that the suit may have been designed to help make the case for the Obama administration's push this month for legislation to overhaul financial regulation. 
 
 SEC officials say that they told Goldman last summer the agency would probably bring action, and that the bank did not show any contrition. At the same time, they say they wanted to use the Goldman case to make a broader statement about the agency's renewed intention of holding prominent financial firms accountable for misconduct. 
 
 Neither SEC officials nor Goldman executives would discuss the internal dynamics of the case on the record. But people in both camps were preparing Monday for an epic court battle that could offer a chance for both sides to restore their reputations after they were sullied during the financial crisis. 
 
 Victory for the SEC, Wall Street's top regulator, would help restore credibility after it was sharply criticized for not aggressively enforcing securities laws. Victory for Goldman could help the firm answer critics who allege it epitomized the excesses that led the financial sector into its worst crisis in decades. 
 
 On Monday, the case reverberated around the world. Financial regulators in London and Germany said they would open investigations to see if Goldman's sale of mortgage securities broke local laws. 
 
 Goldman's domestic legal troubles could be compounded abroad as foreign regulators open probes into the investment. London's Financial Services Authority and Germany's BaFin regulatory agency said Monday that they were coordinating with the SEC. The Royal Bank of Scotland lost an estimated $850 million and the Duesseldorf-based IKB Deutsche-Industriebank lost more than $100 million on mortgage-related securities set up by Goldman. [Story, A7.] 
 
 The SEC's suit centers on a development central to the financial crisis: the creation of exotic investments that allowed firms to bet on the direction of the housing market. 
 
 The suit asserts that Goldman defrauded investors when it sold them a subprime-mortgage investment in 2007 that was secretly designed to lose value. The agency alleges that Goldman created and marketed the investment without telling its clients that Paulson & Co., a prominent hedge fund, had helped the bank assemble the investment while at the same time was placing bets that it would lose value. The bank received $15 million from Paulson & Co. for its services. 
 
 Goldman has denied the allegations, releasing three statements since Friday rebutting the SEC's points. ||||| SAN FRANCISCO (MarketWatch) -- The Securities and Exchange Commission on Friday charged Goldman Sachs Group Inc. and one of its vice presidents with defrauding investors by misstating and omitting key facts about a financial product related to subprime mortgages. 
 
 The SEC alleged in a civil lawsuit that Goldman GS, -0.89% structured and marketed a collateralized debt obligation that hinged on the performance of subprime residential-mortgage-backed securities, or RMBS. However, it failed to disclose the role that a major hedge fund, Paulson & Co., played in the portfolio selection process as well as the fact that the hedge fund had taken a short position against the CDO. See full story on Paulson & Co.'s role in the Goldman Sachs case. 
 
 "Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party," said Robert Khuzami, director of the SEC's division of enforcement, according to a statement. Read commentary about Goldman's 'faulty brakes' argument. 
 
 Goldman said the SEC's charges "are completely unfounded in law and fact." 
 
 "We will vigorously contest them and defend the firm and its reputation," the investment bank added in a statement. 
 
 Goldman shares were down 13% to $160.02 after the SEC unveiled its suit. See text of SEC complaint. 
 
 "Once upon a time, Wall Street firms protected clients," said Christopher Whalen, who heads the research firm Institutional Risk Analytics. "This litigation exposes the cynical, savage culture of Wall Street that allows a dealer to commit fraud on one customer to benefit another." 
 
 The SEC's suit is aimed at the heart of one of the most profitable hedge-fund trades in history. Paulson, headed by John Paulson, generated billions of dollars in profit in 2007 from bets against CDOs. Other firms also made huge gains in similar trades as the housing market imploded, triggering a global financial crisis. 
 
 "The SEC continues to investigate the practices of investment banks and others involved in the securitization of complex financial products tied to the U.S. housing market as it was beginning to show signs of distress," Kenneth Lench, chief of the SEC's structured and new-products unit, said. 
 
 Still, Paulson & Co. wasn't charged by the SEC because the hedge fund firm wasn't obligated to tell investors about the CDO. Read about Paulson's involvement. 
 
 Paulson & Co. paid Goldman to structure a transaction in which the hedge-fund giant could take short positions against mortgage securities chosen by Paulson & Co. based on a belief that the securities would experience credit events, the SEC alleged. 
 
 Marketing materials for the CDO known as Abacus 2007-AC1 told investors that the portfolio of residential-mortgage-backed securities underlying the CDO was selected by ACA Management LLC, a third party with expertise in analyzing credit risk in these securities. 
 
 The SEC alleged that, undisclosed in the marketing materials and unbeknownst to investors, Paulson & Co., which was poised to benefit if the RMBS defaulted, played a significant role in selecting which RMBS should make up the portfolio. 
 
 After participating in the portfolio selection, Paulson & Co. effectively shorted the RMBS portfolio it had helped select by entering into credit-default swaps with Goldman to buy protection on specific layers of the Abacus capital structure. 
 
 "Given that financial short interest, Paulson & Co. had an economic incentive to select RMBS that it expected to experience credit events in the near future," the SEC said. 
 
 Goldman did not disclose Paulson & Co.'s short position or its role in the collateral selection process in the term sheet, flip book, offering memorandum or other marketing materials provided to investors, the SEC said. 
 
 Investors in these securities, including German bank IKB (IKB) and Dutch financial-services company ABN Amro, now a unit of the Royal Bank of Scotland RBS, -1.78% lost more than $1 billion when the securities in the CDO turned toxic, the SEC said. 
 
 Paulson & Co. made a profit of roughly $1 billion on the trade, the regulator added. 
 
 Paulson & Co. said in a statement that it wasn't involved in selecting the collateral that went into the ABACUS CDO, in contrast to the SEC's allegations. 
 
 "ACA as collateral manager had sole authority over the selection of all collateral in the CDO," the hedge fund firm said. "While Paulson purchased credit protection from Goldman Sachs on securities issued under the ABACUS ABS CDO program, we were not involved in the marketing of any ABACUS products to any third parties." 
 
 "Paulson did not sponsor or initiate Goldman's ABACUS program, which involved at least 20 transactions other than that described in the SEC's complaint," the firm continued. "As the SEC said at its press conference, Paulson is not the subject of this complaint, made no misrepresentations and is not the subject of any charges." 
 
 The deal closed on April 26, 2007, and Paulson & Co. paid Goldman roughly $15 million for structuring and marketing Abacus. 
 
 By Oct. 24, 2007, 83% of the RMBS in the Abacus portfolio had been downgraded and 17% were on negative watch. By Jan. 29, 2008, 99% of the portfolio had been downgraded.
– The SEC's fraud suit against Goldman Sachs might be just the tip of the iceberg, because other investment banks engaged in exactly the same sleight of hand, Pro Publica reports. Goldman is accused of failing to disclose that a hedge fund was both helping to create, and betting against, the investments Goldman was selling. But several other investment banks, including JPMorgan Chase, Merrill Lynch and Citigroup all did the same thing. The SEC is already investigating some of these other deals, the Wall Street Journal adds. The agency says it'll sue if it believes banks misrepresented securities to their clients. Indeed, Rabobank already sued Merrill Lynch last year, alleging that Merrill did just that with some securities that the hedge fund Magnetar helped create and bet against. When the Goldman case came out, Rabobank issued a statement saying it was “the same type of fraudulent conduct” Merrill had engaged in.