According to Reuters,

The criminal complaint also charged prominent New York City politician Andrew Stein, a Democrat, with making false statements to the Internal Revenue Service and failing to disclose the existence of an entity called Wind River LLC.

Starr stated that funds going to Wind River were loans to Stein, a former president of the New York City Council, for his work as a “placement agent” for investments, according to an affidavit filed in court by an IRS agent.

According to the criminal complaint, Starr misappropriated funds, ripped off his clients and used the cash to buy himself a posh new house.

NBC News reports,

Ken Starr, who boasts a client list that includes Annie Leibovitz, Uma Thurman, Martin Scorsese, Wesley Snipes, Henry Kissinger, Caroline Kennedy and Robert Ziff among others, was arrested by IRS agents this morning and is expected to face investment fraud, tax fraud and other related charges, officials said. He is expected to appear in court later today.

But, being good samaritans, some of the hedge funds on the receiving end of these emails alerted the FBI and the Feds arranged a sting operation.

Here’s one of the emails, cited on Dealbreaker, which Yonni wrote to about 20 hedge funds and an undercover FBI agent posing as a hedge fund manager:

Hi, I have access to Disney’s (DIS) quarterly earnings report before its release on 05/03/10 [sic]. I am willing to share this information for a fee that we can determine later. I am sorry but I can’t disclose my identity for confidentiality reasons but we can correspond by email if you would like to discuss it. My email is eilatcap@gmail.com. I count on your discretion as you can count on mine. Thank you and I look forward to talking to you.

Apparently, all Bonnie wanted out of the heist was a purse and a pair of shoes… From the SEC’s complaint, cited on Dealbreaker:

Hoxie stated “here is the bag that you are going to get for me – thank [sic],” and attached a link to a picture of an expensive Stella McCartney designer handbag available for $700 at Neiman Marcus, an upscale department store. Sebbag replied that he would get Hoxie the bag “next week.” Anticipating that they would receive substantial compensation from the Putative Traders, Sebbag stated “I may be able to [buy] u 2 of them, lol.” Hoxie responded via email, “In that case, i also love love these shoes” and attached a link to a picture of expensive Stella McCartney shoes also sold at Neiman Marcus.

The pair are being charged with one count of wire fraud and one count of conspiracy. They face a maximum sentence of 25 years in prison and a fine of at least $250,000.

According to Politico,

The heart of the matter was whether Goldman Sachs intentionally sold complicated financial products that it knew would fail – or had designed purposely to do so. Goldman strenuously denies this allegation.

But Levin conjectures that Goldman continues to deny the allegation because “the firm cannot successfully continue to portray itself as working on behalf of its clients if it was selling mortgage related products to those clients while it was betting its own money against those same products or the mortgage market as a whole.”

Goldman Sachs’s Chief Risk Officer Craig Broderick begs to differ, however. He basically says that it’s not Goldman’s job to tell its clients whether investments are smart or not– it simply makes the investments possible. Or, as Politico quoted: “Our clients expect us to facilitate transactions for them in all market conditions,” Broderick said in prepared testimony. “As such, the better we understand and can manage risk, the more willing and able we are to transact with clients, regardless of our views on the markets.” Sort of valid argument, I guess. Doesn’t directly address the Paulson issue/the fact that they knew Paulson created the CDOs he was betting against and then they profited off the deal, but whatever.

Next up: Tourre. One of the most anticipated witnesses of the afternoon. For his part, Tourre said “I deny — categorically – the SEC’s allegation. And I will defend myself in court against this false claim.” In the hearing, Tourre sought to portray himself as a simple middleman, but it’s pretty clear from every other article/interview ever done on Tourre that he was the brains behind the operation. And yet, he claimed, “I was an intermediary between highly sophisticated professional investors — all of which were institutions. None of my clients were individual, retail investors.” That may, perhaps be true. His investors may well have been highly sophisticated (as institutional investors with billions of dollars tend to be), but that doesn’t mean that Tourre himself was some idiot just pushing papers.

Regarding the specific allegation that Tourre set up the Abacus deal without revealing that a hedge fund, Paulson & Co., which was involved in selecting the assets at the heart of the transaction, was betting against the mortgages tied to the CDOs selected. Tourre said:

I never told ACA, the portfolio selection agent, that Paulson & Company would be an equity investor in the AC-1 transaction or would take any long position in the deal. Quite frankly, I am surprised that ACA could have believed that the Paulson fund was an equity or long investor in the deal. The AC-1 transaction was not designed to fail.

When asked about how the release Tourre’s personal emails to his girlfriend and others had been released by his own employer made him feel, Politico reports that Tourre responded, “I regret these emails. They reflect very bad on the firm and myself,” Tourre said. “I wish I hadn’t sent those.” Subcommittee’s ranking Republican Sen. Tom Coburn (R-OK), rightly thinking such a response sounded a little canned, inquired as to how many lawyers had helped the Fabulous Fab (as he referred to himself in emails) and he replied that he didn’t know. When asked if Goldman was paying for his counsel, he answered in the affirmative. Shocking.

When questioned about Goldman’s responsibility for the financial crisis of 2008, Goldman mortgage executive Michael Swensen asserted,

We did not cause the financial crisis. I do not think that we did anything wrong. There’s things that I think we could have done better in hindsight.

The entire day boiled down to this: the highly coached Goldman execs gave up nothing. They were at turns incredulous, puzzled, and even “hurt” by the accusations leveled against them, but at no time did they admit to anything. They very slowly and very deliberately responded to every question asked to run out the clock on each questioner’s time limit, as Sen. Susan Collins (R-ME) astutely observed at one point, and categorically denied any wrongdoing. They were professionally coached within an inch of their lives (well, as well as they could be on such short notice). And as the Senators’ collective frustration mounted, the obscenities flew. It’s a shitty situation… because the Senators recognize what’s at stake here. At stake is more than just the reputation of one of the largest, most important financial investment institutions in the world. And, of course, there are potential jail sentences to be served and millions if not billions to be repaid in reparations if Goldman is found guilty of civil fraud. But more importantly, at stake is fate of the crucial financial reform legislation which is currently stuck on the Senate floor thanks to a filibuster by Republicans seeking to alter the proposal.

According to Politico,

Democrats are trying to portray Republicans as the party doing Wall Street’s bidding, and hope that revelations about Goldman Sachs’ conduct will put political pressure on GOP senators to reverse course on the sweeping regulatory bill.

We’ll see in the coming days and weeks if there is any change in the Republicans’ tune.

Anyway, Sen. Chuck Grassley (the dude who helped out Sen. Blanche Lincoln by voting “yea” to get her derivatives bill out of the Agriculture Committee and onto the Senate Floor) decided to asked SEC Inspector General David Kotz to write up a memo about all of the smut at the SEC, and then proceeded to do the responsible, logical thing and leak it to the press. ABC News first reported such scandalous findings as:

One senior attorney at SEC headquarters in Washington spent up to eight hours a day accessing Internet porn. When he filled all the space on his government computer with pornographic images, he downloaded more to CDs and DVDs that accumulated in boxes in his offices.

An SEC accountant attempted to access porn websites 1,800 times in a two-week period and had 600 pornographic images on her computer hard drive.

Another SEC accountant attempted to access porn sites 16,000 times in a single month.

In one case, the report said, an employee tried hundreds of times to access pornographic sites and was denied access. When he used a flash drive, he successfully bypassed the filter to visit a “significant number” of porn sites.

Sigh.

I mean, it’s not like the guys (sorry, that’s sexist– I’m sure it wasn’t only men) at the SEC aren’t the only ones in the world who have ever watched porn at work. The AP mentions a 2006 study that says something like 16 percent of men admit to having done it– and I’m guessing the number is even higher than that.

So the pols can wring their hands and lament the state of the nation as much as they want, but it’s not like their colleagues haven’t been caught in airport bathrooms soliciting sex or sending sexually explicit instant messages to former congressional pages… I mean, I know it’s not quite the same and I can’t say one is any better than the other, but I digress.

According to the AP,

The number of cases [of porn viewing by the SEC] jumped from two in 2007 to 16 in 2008. The cracks in the financial system emerged in mid-2007 and spread into full-blown panic by the fall of 2008.

There might be a little “Who came first? The chicken or the egg?” thinking here, but I’m not much of a philosopher. Did the rise in porn usage by the SEC result from stress from the imploding economy? Or did the SEC’s increased use of porn mean they were spending less time actually doing their jobs and therefore less time monitoring what was going on in the financial world and OMG! The SEC caused the recession!

Anyhoodle, on April 20, the SEC fired up the batmobile and arrested five people from Staten Island who thought it was a good idea to pretend to run a $1.4 billion hedge fund– because, you know, the SEC is made up of a group of people whose mission in life is basically just to be a major buzz kill. Thanks, Mary Schapiro. In reality, according to Business Insider, these schmucks were actually using fake names, offices, and ridiculous quotes on ridiculous (I honestly can’t think of another more appropriate word) websites to lure in investors rather than running any sort of a legit business. I’ve got to give them credit, though: these guys saw an opportunity to swindle investors and they didn’t just go with your typical Ponzi scheme– no, these guys really went above and beyond, using all of their combined creative forces to compose their fictional ten-man team of superstar grads from Harvard and Wharton. But they didn’t stop there. No, these assclowns decided to bring in the big guns and created false endorsements from the likes of the Financial Times and George Soros. It would be brilliant if it weren’t so completely unbelievable– except, here’s the thing: people actually bought it.

An example of some of the crap they were peddling, according to Business Insider:

Ken Marsh, who went by “Ken Maseka,” “Michael Warren,” and “Marcus Thorn,” according to the SEC’s complaint, was a front-man for the fake $1.4 billion fraudulent hedge fund. He described himself to investors as “Wall Street’s Most Wanted,” using this bio:

Back in 1991 Kenneth Maseka was the most sought after trader on Wall Street for his uncanny knack for finding Wall Street’s hidden gems. In 1995 his average profit exceeded 1000% per trade (not much has changed since then.)

Goldman Sachs, Lehman Brothers and Bear Stearns could not lure him away with offers of millions of dollars up front to come over. Maseka asked himself, “Where is the challenge,” and passed on their generous offers. Anyway, when you are averaging 1000% per trade there is no need to be an employee and a few million dollars is nothing in the long-term scheme of things. (Emphasis ours.)

But, as it turns out, Ken Maseka is a fictional character of Ken Marsh’s invention. The company also made up the rest of its other employee’s names, and fudged the fact that Maseka and Michael Warren were billionaires. A quick fact check of Forbes’ billionaires list by any potential investor doing even the most routine due diligence would have tipped them off that something was rotten in the state of Denmark. Also fake: Gryphon’s Wall Street address. Their real office is in Staten Island in between a martial arts school and a bakery. Classy.

Better yet, these guys posted “press” from the FT, which supposedly wrote:

This secret group has identified as the latest hedge fund to exploit the weakening sub prime markets – pounding stocks down to nothing and making billions along the way, one hedge fund run by this group had been rammed to see returns of over 1000% in 2007.

But the most deliciously deceitful part of the scam is that they went so far as to post a fake quote from, of all people, George motherfu$&ing Soros on their website pretty much saying that these guys were the shit.

“Alone the traders of Gryphon Financial are incredible, together they are unstoppable”
– George Soros

I mean, really? I honestly can’t believe people bought this crap.

According to Business Insider, some of the other BS they posted on one of their related sites (Gryphon Daily) included:

* “Join this Exclusive Service or Go Broke!”
* “It’s like having your own mini Hedge Fund”
* 9 out of every 10 trades will hit 100% profit status?
* Returns of Up to 483% in Less Than 2 Months?
* Just this once – step outside your comfort zone – buy stocks without prejudice and don’t look at the numbers, don’t look at the chart, buy the stock the minute you hear from us and don’t sell a single share until we tell you to – do this and you are rich, do not and continue to invest in mediocrity.”

Sadly, a surprising number of people fell for it. The five alleged fraudsters ended up scamming some $17.5 million from unsuspecting investors.

Centaur Group’s Galileo fund makes investments not in traditional stocks, commodities, or derivatives, but rather by betting on the outcomes of actual tennis matches, soccer and cricket games, golf tournaments, and horse races. By all accounts, Galileo is the first hedge fund ever to make bets on sports.

Mark Cuban, owner of the Dallas Mavericks and perhaps more famous for his stint on Dancing with the Stars, caused quite a stir five and a half years ago when he had announced his intentions of starting a similar sports betting hedge fund, but quickly came up against opposition because of U.S. laws. Now Cuban is an outspoken supporter of the Centaur venture– and Tony Woodhams, the managing director at Centaur Group, which operates Gallileo, likewise, has said that Cuban was right on with his instincts that the stock market had more inefficiencies than sports betting. According to CNBC,

Besides emotion, Woodhams said that the sports market has a lot of mispricing, with some bookmakers that don’t often set the best lines for every game. The market isn’t effected by the economy and there’s no intervention from outside parties like a central bank or a government.

Woodhams was quoted in the LA Times as saying,

We put numbers against those things that you and me and everyone in pubs have casual discussions about. That gives us an edge on these markets.

Woodhams claims that Centaur has a proprietary number-crunching system that is data-driven and can make sports bets with far better results than the casual bettor. In fact, the Centaur plans even plans to use fluctuations in odds and point spreads that are affected by amateur bets to its advantage and somehow make money off of it. The exact method is, obviously, proprietary and probably beyond my comprehension anyways because I was never much of a gambler, but we’ll soon see if they can produce results or if they’re just talking a good game.

Though the firm is technically based out of Gibraltar (where the regulatory environment is a little bit more lax), Centaur will have 25 traders working on its London trading floor. According to the LA Times,

The traders will use statistical modeling to place bets on websites such as Betfair, which is popular in Britain but banned in the U.S. The bets will not just be on matches’ final outcomes — Centaur will also wager on items such as the over-under that takes into account the total points scored.

Of course, Galileo is not the kind of “sports bet” you make lightly– and it’s not open to just anyone. The fund requires a minimum investment of 100,000 euros (about $135,000). Not exactly pocket change. But Woodhams has found a few investors (he says there are fewer than twenty), and he has set a goal of growing assets under management to $100 million within the next two years. And Centaur is charging a hefty 3% management fee and 30% performance fee– not the typical “2 and 20″ seen in the industry. Maybe he has a L’Oreal Complex and can justify the exorbinant rates “because he’s worth it”– after all, he is projecting returns of 15-20 percent. For it’s part, the fund promises not to bet more than five percent of assets under management on any one event.

For now, at least, the fund is only open to Europeans– the SEC has yet to confer its blessing. According to the LA Times, Woodhams said Centaur hope to get SEC approval sometime in 2011. In the U.S., online sports betting is generally illegal (as Cuban found out), with horse racing being the major exception. But some gambling experts say Galileo could win approval because Americans who invest in the fund would not be placing bets themselves. So for now, at least, loaded Americans with a gambling penchant are SOL. But there’s always Vegas…

Here’s a short guide to telling the difference between two of the biggest names in finance:

* Early Years: Henry (Hank) Paulson was born in Palm Beach, FL, later moved to Barrington, IL, and went to Dartmouth undergrad where he was an ΣΑΕ (ΦΑ, gents) and also graduated Phi Beta Kappa and was All Ivy, All East, and honorable mention All American in Football. He went on to receive a Harvard MBA. John Paulson was born in Queens, NY and went to NYU undergrad where he graduated valedictorian of his class. He went on to receive a Harvard MBA where he was designated a Baker Scholar.

* Career: Hank Paulson was Staff Assistant to the Assistant Secretary of Defense at The Pentagon from 1970 to 1972. He then worked for the administration President Richard Nixon, serving as assistant to John Ehrlichman from 1972 to 1973, during the Watergate scandal for which Ehrlichman was convicted and sentenced to prison. After that, he joined Goldman Sachs and rose through the ranks, eventually becoming CEO from 1999-2006, after which he left to become US Secretary of the Treasury.

* Career: John Paulson began his career at Boston Consulting Group before leaving to join Odyssey Partners. He later worked in M&A at Bear Stearns, then became a partner at the mergers arbitrage firm Gruss Partners LP. In 1994, he founded his own hedge fund (Paulson & Co.) with $2 million and two employees (himself and an assistant). Paulson & Co. is now the world’s third largest hedge fund, with $32 billion in assets under management, thanks in large part to its successful bet on the housing market crash.

*Run-ins with the SEC: John Paulson’s name popped up in connection with civil fraud charges filed against Goldman Sachs and VP Fabrice Tourre last Friday. According to the charges, Goldman and Tourre allegedly misstated and omitted the fact that the CDOs they were marketing to investors as the housing bubble was bursting were tied to subprime mortgages that Paulson had helped create and recommend to Goldman– mortgages which he later bet against by buying credit default swaps, garnering over $1 billion for himself and $3.7 billion for his firm. Although Paulson was not named in the suit and Goldman denies all wrongdoing, reputations have been dragged through the mud. Hank Paulson, meanwhile, allegedly received a tip from GE in 2008 that it was having trouble selling debt and the SEC has taken an interest in why the company shared this info with the Sect. of the Treasury and no one else, particularly because it has been suggested Paulson profited from this information.

*Wealth: Hank, by no means poor, has amassed a fortune of somewhere in the vicinity of $700 million, according to various web sources. However, John’s hedge fund paydays put his net worth somewhere in the $12 billion range. He is ranked #45 on Forbes list of the World’s Richest People.

*What They’ll Be Remembered For: Hank Paulson is most famous for his service as the US Secretary of the Treasury and his handling of the financial crisis– specifically TARP and bailouts of “too big to fail” firms. John Paulson is most famous for his financial prowess and huge accumulation of wealth through operation of his hedge fund– though, now, he will probably also be remembered for his role in betting against the housing market.

I honestly don’t know. These sort of back-room deals done with a handshake and a wink and a smile by the a couple of “old boys club” guys in $5,000 suits are notoriously hard to police. Sure, we can attempt to limit compensation and cut big banks out of hedge fund activity and proprietary trading. We can require hedge funds to register with the SEC or with some regulatory body abroad, monitor their risk exposure and the amount of leverage they can take on, restrict who they can employ in third party roles, try to force them to increase transparency… but, honestly, there are nearly 15,000 single-strategy hedge funds globally… somehow I feel that, even with the most dedicated and brightest of staff (and the SEC is apparently looking to hire experienced hedge funders now so they will have insight into the inner workings of hedge funds in order to properly monitor them), the highly intelligent minds running those hedge funds will be able to find loopholes in whatever laws the government comes up with– or just disregard the laws entirely and conceal whatever devious designs they have to make a fast buck. There will always be loopholes—and sometimes, making money isn’t pretty. In fact, greed can be downright ugly, as we have seen here with the Goldman fraud charges. The only real solution I can see is to minimize the opportunities for such insider deals by pushing as many transactions as possible onto central clearinghouses and exchanges in order to increase transparency– and that’s not really a solution. People will still find ways around it.

Ever since Lehman collapsed in 2008 and America has really been feeling the financial strain (not that our economy was exactly setting records prior to that), there has been public outcry that something be done. Big banks are not making themselves look good. Hedge funds are not helping themselves out here either, despite the fact that official reports looking into the financial crisis — such as the British government-commissioned Turner Review, published in March — assigned such funds only a marginal role in the melee. But most politicians are quick to blame, the public is easily convinced of their guilt, and they’re an easy scapegoat. It looks really bad when America finds out that they’re the ones largely behind all of this mess… nevermind the fact that there were only a select few jackasses behind the plan to create the CDOs that Paulson would later bet against and Goldman would conveniently forget to tell its investors Paulson had a hand in creating and picking… now both industries will be blamed. And the big paydays for bank and hedge fund heads look really bad when 10 percent of the nation is unemployed and close to 17 percent is underemployed thanks to the mess they helped (in part) to create. I mean, the current state of the economy is hardly entirely Goldman’s fault (or Lehman’s or any one other entity’s), but they certainly didn’t help matters.

So it’s little wonder that Obama and et al., along with most of Europe (with the notable exception of Britain, which is trying to push for softer hedge fund regulation) are clamoring for financial reform, with the U.S. trying to corral the commercial banks and the E.U. seeking to reign in hedge funds. Right now, big banks are a frickin’ jack of all trades. In this case, Goldman was creator, trader, hedger and seller of the CDOs. It reminds me of a Homer Simpson quote: “Television: teacher, mother, secret lover.” Not quite the same, but my brain is wired a little funny, and I have loose associations, so indulge me. My point is, maybe banks have their fingers in too many pies and their sticky fingers are creating quite a mess… at least such is the thinking behind the proposed legislation. If we were to restrict the number of functions they could perform, we could also eliminate some of the conflicts of interest. Maybe.

But the banks are fighting hard against the legislation designed to weaken their market power, despite the fact that their actions continue to erode public trust in the markets. It’s a real blow to the financial system as it struggles to rebuild public confidence. And as long as this lack of trust and uncertainty persists, markets might charge a higher systematic risk premium. A new breakdown in trust could also undermine efforts to revitalize the battered financial industry, possibly increasing concerns about transparency, due diligence and complexity.

It’s unlikely that the timing of the charge brought against Goldman is coincidental: Obama is probably going to use it politically to bolster his argument that America seriously needs the financial reform he is proposing– most likely, as the Washington Post put it, “as a cudgel to persuade Republicans to line up behind the bill.” I already thought that the odds of the legislation being passed were high, but now I’m all but certain of it. The public wants greater oversight. They want the big banks to stop screwing them over and taking them under when they bet big and lose.

The SEC’s allegations against Goldman are hardly shocking, and I expect that in the coming weeks/months we will see more charges against other firms involved in similar investment schemes. A headhunt was all but inevitable—it’s just took a little longer than I personally thought it would. But, again, maybe Obama was biding his time, waiting to announce it so that it coincided with the near-passage of his proposed financial reform legislation. Just a pet theory.

The sad truth is that there is a solid chance that Goldman may get away with this, despite the public desire to see heads roll. The reality of the situation is that there has been a lot of deregulation in recent years (see the Commodities Futures Modernization Act of 2000, for example)—maybe too much deregulation for Goldman to be found guilty, and maybe too much for these charges to even stick. You’ve got to know Goldman has it’s legal team working overtime to find a way out of this, and fast– before its stock sinks any lower. It’s entirely possible that Goldman’s conduct may be ruled distasteful and unethical, but technically legal… Unbelievable as that may seem, it’s entirely possible. Only time will tell.

Apparently the SEC doesn’t have enough to go to trial against Paulson… because technically there is nothing illegal (though the words “douche-y” and “unethical” come to mind) about going to Deutsch and Credit Suisse Bear Stearns and Goldman and asking them to create a toxic mortgage product just so he could bet against it. And a statement from Paulson & Co. quoted in the New York Times has emphasized that the firm was “not involved in the marketing of any ABACUS products to any third parties,” and that the deal’s CDO manager and not Paulson “had sole authority over the selection of all collateral in the CDO, securities of which were subsequently rated AAA by both S&P and Moody’s.” But the SEC is pursuing the case against Goldman and Tourre– because the the public bloodlust demands that someone pay. Goldman is saying the charges are unfounded and vowing to fight them and defend its reputation. Right.

The whole thing is pretty simple: Goldman (like other firms who will probably emerge as part of a similar investment scheme betting on the housing downturn and be charged later– Soros Asset Mgmt. and Magnetar profited from similar deals, but don’t appear to have had any special relationships with investment banks that have been discovered thus far) teamed up with one of its most valued hedge fund clients to create subprime mortgage products the hedge fund would later bet against. And the SEC, like many others, feels that Goldman and Tourre owe investors more than just a “my bad”.

The SEC maintains that Goldman should have told investors that the product they were being sold was linked to the performance of certain mortgages and that the hedge fund betting on the mortgages’ demise helped design the product. In fact, Goldman brought in a third party, ACA Capital, to manage the deal named Abacus 2007-AC1. So Goldman told investors that ACA was responsible for picking the bonds– not Paulson. The SEC says this is enough to support civil fraud charges. When this was announced on Friday, Goldman’s stock dropped some 13 percent, while the stock of several of the underwriters of those mortgages, such as Deutsch, Morgan Stanley, and Bank of America, which owns Merrill Lynch, and Citigroup, dropped 9 percent, 6 percent, 5 percent and 5 percent, respectively.

Deutsche Bank AG, UBS AG and Merrill Lynch & Co. are among those firms that created mortgage deals that went sour. It is not yet known who the SEC is investigating. Traders say that the deals generated about $1 billion in total fees for the firms. Investors in the CDOs Paulson helped create/Goldman sold ended up losing $1 billion in what was one of the worst-performing deals of the housing-crisis. Paulson & Co. walked away with something like $3.7 billion in 2007 by betting against the housing market, according to the LA Times. Turns out Paulson really knows how to pick ‘em. According to the Wall Street Journal, future cases may hinge not just on questions such as whether a deal favored one client or another, but whether there was misrepresentation.

A critical part of the SEC’s case against Goldman is that the firm allegedly misled investors by not notifying them of the role of hedge-fund investor John Paulson—who was dubious of the housing boom—in selecting what went into the mortgage deal Goldman sold. Goldman said it fully disclosed the investments and didn’t need to reveal the Paulson connection.

According to a different New York Times article, Goldman’s mortgage group consisted of several hundred people split up into several subgroups, each with a specialty, which took different positions on the mortgage market. Fabrice Tourre’s mortgage group’s position clashed with many of the others by betting against the housing market, most of which took positive positions. “[Golman employee Jonathan] Egol and Fabrice were way ahead of their time,” said a former Goldman worker. “They saw the writing on the wall in this market as early as 2005.” Although an unpopular position within the company at the time, it turned out to be incredibly prescient. Unfortunately for Goldman, it just might turn out to have been a little illegal.

If you want insight into the whole CDO thing and don’t want to spend money on Michael Lewis’s The Big Short, you can read AK Barnett-Hart’s Harvard Thesis, which Lewis mentions in the acknowledgments section of his book here for free. It’s a lot drier and more academic than Lewis’s book, but it’s still insightful– and it’s well written and, most importantly, it’s free.

For his part, Lawton, is saying his business was legit and he never took investor funds for personal use. The Minneapolis Star Tribune cites a sworn affidavit filed in federal court in which Lawton said,

The fund was a legitimate hedge fund. The fund was not a scam or a Ponzi scheme, as the SEC alleges. Any loss of investor money was the result of market losses, not theft.

Obviously, the SEC disagrees and claims that the proceeds that Lawton took from the fund and the fund’s general partner, which he controlled, “were as a result of the fraudulent hedge fund investment scheme.”

According to the criminal complaint against Lawton, he provided false account statements showing profitable investments from 2002 through 2008, except for one losing year, 2004. His unbelievable returns ranged from 19.22 percent to 64.97 percent, according to the Star Tribune…. and, in return for these spectacular returns, Lawton charged a 1 percent management fee and 25 percent performance fee.

In a motion filed this past week, the SEC said, “Lawton and Crossroad were unjustly enriched by the fraud and are therefore liable for the entire amount of illicit profits.”

Lawton, whose investors were principally family and friends, has said in response to the SEC motion, “When investors lost money, I also lost money. Any compensation was completely in accordance with the limited partnership agreements the investors signed.”