Legal News

New Revelations Complicate SEC v Goldman

By Amir Efrati

When the Securities and Exchange Commission sued Goldman on Friday, it filed a civil complaint in federal court that, at 22 pages, seemed mighty short compared to most of the complex securities-fraud cases we read each day. And because Goldman’s defense wasn’t reflected in that document, we were sure more facts would spill out in the following days.

Today is one of those days.

In its complaint, the SEC spends a lot of ink on an allegation that Goldman misled a firm called ACA. Now some new information could muck up that allegation. Here are stories from WSJ and CNBC.

But not all of today’s news is good for Goldman. This report from NYT undercuts one of the defenses Goldman has been broadcasting since last weekend — that it lost $90 million because it, too, was an Abacus investor.

First we’ll discuss the matter that could aid Goldman’s defense.

Goldman Sachs, ACA, and a hedge fund run by John Paulson structured the Abacus investment at the heart of the SEC’s case. Both Paulson and ACA had a hand in selecting the mortgage securities that would be tied to the Abacus investment, the SEC said, though only ACA’s involvement was disclosed to potential Abacus investors.

According to the SEC, Goldman misled ACA into believing Paulson was a so-called equity investor in Abacus that wanted the mortgage securities — and Abacus — to perform well. However, it turned out that Paulson had placed bearish bets on the deal.

Today WSJ and CNBC reported that a former top executive at the Paulson firm told SEC investigators in 2008 that before the deal was finalized in spring 2007, Paulson had notified ACA that the firm was indeed bearish on Abacus.

If ACA knew Paulson was bearish, that "could bolster Goldman's defense that nobody was misled here," said Peter Henning, a law professor at Wayne State University. "This could be a chink in the fraud case," he said.

However, James Cox, a law professor at Duke University, said the alleged disclosure by Paulson's firm to ACA doesn't necessarily destroy the SEC's case. It "doesn't take away from the major claims" that other investors who relied on Goldman's representation that ACA selected the underlying securities were duped because they weren't told about Paulson's involvement.

The NYT report we referenced above said Goldman tried hard to get out of its Abacus investment shortly after the transaction went live in 2007. Goldman’s Fabrice Tourre — a defendant in the SEC’s lawsuit — “embarked on a desperate, and ultimately fruitless, search for someone to buy Goldman's stake in the deal,” the report said.

Thus, the report implies, Goldman’s defense that it lost money on the deal and thus had no motive to mislead investors could be construed as disingenuous. Goldman, of course, has denied any wrongdoing in this matter.

Full post as published by Law Blog - WSJ.com on April 21, 2010 (boomark / email).