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Will The SEC's Case Against Goldman Be Difficult To Win?

By Big Tent Democrat

The NYTimes writes a news analysis story arguing so:

In accusing Goldman Sachs of defrauding investors, regulators are not only taking aim at a company with deep pockets and a will to fight — they are also pursuing an unusual claim that could be difficult to prove in court, legal experts said.

I have not delved enough into the facts of the case to know if this is true, but some statements in the article seem clearly wrong on the law. This statement for instance:

To win its case, the S.E.C. must prove that Goldman was not merely silent about Mr. Paulson’s role but actually gave investors the wrong impression, experts in securities law said. Then it must prove that the missing information was material, a legal term meaning that investors armed with that knowledge might have decided not to buy the product from Goldman, or to do so at a lower price.

(Emphasis supplied.) That is not a good description of the standard in my view. We went through this issue before. The standard the reporter is trying to articulate is this:

To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading [. . .]

The issue is less likely to be, in my view, whether Goldman was misleading about the role of Paulson (which was shorting the position of the investment), but whether Paulson's position on the investment position was material to the offering. Indeed, in the next paragraphs of the story, it becomes clear that this will be the key issue:

Allen Ferrell, a law professor at Harvard, said the suit rested on an unusual definition of material information.

From a common sense perspective, it seems to me that this law professor has the better of the argument:

Adam C. Pritchard, a law professor at the University of Michigan, said that the S.E.C.’s focus on the construction of Goldman’s security reflected the increased complexity of financial instruments. Construction has simply become a more important part of the process, he said. But he added, “The basic idea that an undisclosed conflict of interest could be misleading is pretty much as old as stockbrokers.”

(Emphasis supplied.) Indeed. One other flaw in the story it seems to me is this idea that convincing a jury will be difficult for the SEC:

Several experts on securities law said fraud cases like this one, which focuses on context rather than content, are generally more difficult to win, because it can be hard to persuade a jury that the missing information might have led buyers to walk away.

(Emphasis supplied.) I must strongly disagree with the legal experts the Times is relying on. The easiest part of this case for the SEC will be convincing a jury to find against Goldman. The hardest part for Goldman would be GETTING to a jury and avoiding a judgment as a matter of law by the judge who will preside over the case.

Indeed, the most important aspect of this case is not discussed in the story in my view - what judge has the case been assigned to? (kaleidescope helpfully informs me that the case has been assigned to Judge Barbara Jones.) It is possible that Goldman will fight the case all the way to the Supreme Court. I personally doubt it and figure the issue is how much will Goldman pay to settle the case and how much will the SEC accept. A key consideration to that calculus is how confident is Goldman that it can win a judgment as a matter of law. The judge in the case will decide that in the first instance.

If settlement is the route chosen, what will it take to make this case go away? Both for Goldman and the government, this could be the key consideration. Will Goldman judge the PR hit too extreme? Will the government think the same, for opposite reasons? The dollars are, frankly, meaningless to Goldman. Whatever they pay will be chump change for them. But how will the number be perceived? It seems more of a PR decision than a legal decision, both for the government and Goldman.

In any event, in the words of Roland Hedley, Jr., time will tell.

Speaking for me only

Full post as published by TalkLeft on April 20, 2010 (boomark / email).