“The product was new and complex, but the deception and conflicts are old and simple,” Robert Khuzami, the director of the S.E.C.’s division of enforcement, said in a statement on April 16, 2010 after SEC charged Goldman Sachs with fraud . “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.”

The SEC ’s charges against Goldman Sachs (GS) marks the first time financial regulators have gone after a Wall Street firm that sought to exploit both investors and the housing crash. And it’s a big deal.

In essence, the SEC has charged Goldman with hawking collateral debt obligations, a type of credit derivative, to investors without letting them know that the CDOs were designed by a guy who fully expected them to fail. And not just any guy — Goldman let hedge fund kingpin John Paulson pick which subprime mortgage bonds he wanted the CDOs to contain. Why? So he could short the hell out of them on the open market.

More broadly, the complaint highlights the tentacle-like conflicts of interest that engulf Wall Street. Those conflicts themselves dramatically highlight how investment banks reap huge rewards by playing investors off each other.

Paulson, and Goldman, both made multi $billion profits up on the collapse in the housing market. The fund manager made $20 billion in 2007 and 2008, earning plaudits for what some called “The Greatest Trade Ever.”

“This litigation exposes the cynical, savage culture of Wall Street that allows a dealer to commit fraud on one customer to benefit another,” said independent banking analyst Chris Whalen in a note to clients.

The SEC says Paulson’s firm in 2007 paid Goldman to develop a financial instrument, which the bank dubbed “Abacus,” that would allow him to take short positions against various mortgage securities. Knowing which ones to short was easy because Paulson had selected the investments himself expressly because they were likely to lose value.

Meanwhile, Goldman VP Fabrice Tourre was pushing Abacus on pension funds, banks and other investors, partly by indicating that the CDO would be handled by a prominent funds management firm, ACA. None of the company’s marketing materials for the product disclosed Paulson’s involvement in the deal, according to the SEC. Tourre also misled investors into believing that Paulson had taken a “long” position on Abacus by investing $200 million. He hadn’t.

The scandal here is not that Goldman was short the subprime market at the same time as marketing the Abacus deal. The scandal is that Goldman sold the contents of Abacus as being handpicked by managers at ACA when in fact it was handpicked by Paulson; and that it told Abacus that Paulson had a long position in the deal when in fact he was entirely short.

The CDO subsequently bombed, and the investors lost big. Pauslon paid Goldman roughly $15 million to set up Abacus, closing the deal in April 2007. By January of the next year, the value of virtually the entire portfolio of securities had plunged. Investors lost more than $1 billion; Paulson made $1 billion.

Goldman’s defense – “We certainly did not know the future of the residential housing market in the first half of 2007 anymore than we can predict the future of markets today. We also did not know whether the value of the instruments we sold would increase or decrease.”

Maybe so, but Goldman Sachs knew the bonds included were being hand selected by a short seller with a lot to gain by betting against the bonds.

One question. Why didn’t the SEC also charge John Paulson, along with Goldman and Tourre? The facts show that Goldman Sachs emerged from the housing bust financially unscathed and John Paulson made $1 billion in proceeds from this crime.

Were other banking giants doing the same thing? It’ll be interesting to see if Goldman is the only firm charged by the SEC or whether this is the first in a wider campaign targeting conflicts of interest on the Street.

Now that their crime has be exposed should Goldman Sachs be allowed to make a deal with the SEC to get them off the hook for illegally defrauding its investors of $1 billion when the actual damage caused by the illegal actions of Goldman Sachs cost US taxpayers $trillions? As stated in the previous nbGazette report Goldman Sachs is trying to secure a settlement with the SEC whereby they would have to pay up to $1 billion in damages to affected investors in exchange for the SEC dropping civil charges of fraud. If the SEC is stupid enough to make such a deal who will be held accountable to the American people? Who will stand trial for defrauding the US taxpayers of $trillion in Wall Street bank bailouts? The Goldman Sachs fraud scheme didn’t just cause its CDO investors to lose $1 billion it also caused the US taxpayers to lose $trillions. Goldman Sachs’ securities fraud is the root cause and domino effect of the US financial crisis. Goldman Sachs was the hand that pushed over the first domino by devising a scheme that permitted a client (John Paulson) that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while falsely telling other investors that the securities were selected by an independent, objective third party. The US government and financial experts has already determined that the subprime mortgage crisis is what started the US and then Global Financial Crisis. So if the SEC is charging Goldman Sachs with fraud and their claim is based on Goldman Sachs and John Paulson’s mortgage market scheme then is it not safe to say that Goldman Sachs’ illegal activity is the root cause of the US and Global financial crisis? The SEC has charged Goldman Sachs with fraud in relation to subprime mortgages. The SEC filing on April 16, 2010 says that “the Securities and Exchange Commission today charged Goldman Sachs & Co. and one of its vice-presidents for defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter.”

After considering all the evidence the SEC should not allow Goldman Sachs to simply walk away from their crimes with a slap on the wrist fine of $1 billion. The SEC should proceed with civil trial against Goldman Sachs and let a jury decide for the American people whether Goldman Sachs is guilty or innocent. If found guilty by a jury, the CEO’s involved (present and past) must pay for their crime and receive lengthly jail time and the assets of Goldman Sachs (all $880.528 billion) should be liquidated and the funds given back to the American taxpayers. This will send a clear message to all bankers and financial brokers and the US will never have another financial crisis again.