The Securities and Exchange Commission (SEC) today charged Goldman Sachs Group Inc. and one of its vice presidents with defrauding investors.

The commission alleged that Goldman Sachs misstated key facts about a collateralized debt obligation (CDO), a financial product tied to subprime mortgages, as the U.S. housing market was beginning to falter.

The complaint said Goldman Sachs structured and marketed a synthetic CDO that hinged on the performance of subprime residential mortgage-backed securities (RMBS).

In particular, the SEC claims, Goldman Sachs downplayed the role that a major hedge fund played in the portfolio selection process and that the hedge fund had taken a short position against the CDO.

“The product was new and complex, but the deception and conflicts are old and simple,” said Robert Khuzami, director of the SEC’s Division of Enforcement. “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.”

Allegedly, New York-based Paulson & Co., an employee-owned hedge fund, paid Goldman Sachs to structure a transaction in which Paulson could take short positions against mortgage securities chosen by Paulson, based on a belief that the securities would experience credit events.

In addition, the SEC claims that Goldman Sachs Vice President Fabrice Tourre was responsible for the CDO’s marketing materials, which represented that the RMBS portfolio underlying the CDO was selected by ACA Management LLC, a third party with expertise in analyzing credit risks in RMBS.

But according to the SEC, Tourre knew of Paulson’s undisclosed short interest and role in the collateral selection process.

The SEC’s complaint charges Goldman Sachs and Tourre with violations of the Securities Act of 1933. It was filed in the U.S. District Court for the Southern District of New York.

“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,” said Kenneth Lench, chief of the SEC’s structured and new products unit.

Goldman Sacs issues a press release stating that the SEC charges are “completely unfounded in law and fact” and that the company will contest the charges and defend its reputation.