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The U.S. Securities and Exchange Commission should force Goldman Sachs Group Inc. (GS) to return funds it got from American International Group Inc. (AIG) if the insurer sold default protection based on fraudulent conduct by Goldman, two Congressmen said.

The U.S. Securities and Exchange Commission should force Goldman Sachs Group Inc. (GS) to return funds it got from American International Group Inc. (AIG) if the insurer sold default protection based on fraudulent conduct by Goldman, two Congressmen said.  3

The U.S. Securities and Exchange Commission should force Goldman Sachs Group Inc. (GS) to return funds it got from American International Group Inc. (AIG) if the insurer sold default protection based on fraudulent conduct by Goldman, two Congressmen said.

The securities, part of a group of collateralized debt obligations dubbed Abacus, are tied to home loans, much like the single Abacus CDO that federal regulator has said Goldman misrepresented to potential buyers. AIG, which was bailed out by the federal government, has paid $2 billion to buyers of credit-default swaps that pay out when the Abacus securities lose value.

“It is imperative that the SEC pursue the recovery from Goldman Sachs of any fraudulently obtained AIG payments,” Democratic Reps. Elijah Cummings of Maryland and Peter DeFazio of Oregon said in a letter they are circulating on Capital Hill and plan to send to SEC Chairwoman Mary Schapiro. “Should this or any subsequent investigation uncover criminal misconduct, we implore you to refer those matters to the Department of Justice for the appropriate prosecution.”

The Abacus security at the heart of the SEC civil-fraud case against Goldman was backed by ACA Capital Holdings Ltd. The SEC has accused Goldman of defrauding investors in the deal because the securities firm didn’t warn that the hedge fund Paulson & Co. helped ACA pick some of the mortgage assets and would profit if the underlying mortgages defaulted.

Goldman Sachs has denied the SEC’s charges and said it would vigorously defend against them. Paulson and ACA weren’t named in the SEC’s complaint.

AIG’s Financial Products unit played ACA’s role–agreeing to pay out if the securities declined in value–on seven additional Abacus CDOs, the congressmen said.

The SEC said Goldman was “responsible for ACA’s misimpression” that the Paulson hedge fund would profit if the securities rose in value instead of declining. AIG spokesman Mark Herr declined to comment on whether AIG was aware of Paulson’s role or the insurer’s interactions with Fabrice Tourre, the Goldman Sachs banker named in the SEC complaint.

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