Goldman disclosed in a February 24 10-K filing that the SEC had issued the company a "Wells notice," a notification that agency staff are recommending that the Commission take legal action. The notice relates to a $1.3 billion offering of subprime mortgage securities Goldman underwrote in late 2006. If the SEC proceeds with a civil case against the investment bank, it would mark the second time in two years that the agency has gone after the firm over securities it sold in the run-up to financial crisis.
According to Fortune magazine, SEC scrutiny of Goldman's bond sale likely centers on a bundle of more than 5,000 mortgages the company marketed called Fremont Home Loan Trust 2006-E (FHLT-2006E). Fortune reports that out of the nearly 100 mortgage investment deals made by Goldman in the second half of 2006, "only the Fremont deal was worth $1.3 billion and met other criteria, such being primarily made up of subprime residential loans." Mortgage guarantor Freddie Mac (FMCC) -- and ultimately U.S. taxpayers -- wound up paying an estimated $545 million to investors when borrowers defaulted on the Fremont loans.
The Federal Housing Finance Authority, which oversees Freddie Mac and Fannie Mae (FNAM), is already suing Goldman over Fremont Home Loan Trust. The agency in November filed suit over this and a number of other residential mortgage-backed securities that the government-sponsored enterprises bought from Goldman for more than $11.1 billion.
In the prospectus for Fremont, Goldman told investors that out of the 5,012 home loans involved in the securities deal, only one homeowner had borrowed more than the house was worth. However, an audit conducted as part of the FHFA suit found at least 1,179 loans that were already "underwater" at the time Goldman was trying to sell the security to investors.
In 2010, Goldman paid a $550 million fine to settle SEC charges that it lied to investors when it sold a mortgage-backed security named Abacus.