Wall Street Sweethearts (Partners in Crime)

April 15, 2010


SEC v. Goldman Sachs & Co., Fabrice Tourre

The SEC civil action in the Southern District of New York alleges securities fraud against Goldman, Sachs & Co. ("GS&Co") and a GS&Co employee, Fabrice Tourre ("Tourre"), for making materially misleading statements and omissions in connection with a synthetic collateralized debt obligation ("CDO") GS&Co structured and marketed to investors. This synthetic CDO, ABACUS 2007AC1, was tied to the performance of subprime residential mortgage-backed securities ("RMBS") and was structured and marketed by GS&Co in early 2007 when the United States housing market and related securities were beginning to show signs of distress. Synthetic CDOs like ABACUS 2007-AC1 contributed to the recent financial crisis by magnifying losses associated with the downturn in the United States housing market.

Bill Singer's Comment: The SEC's case essentially accuses GS&Co of fabricating the financial equivalent of an Improvised Explosive Device (IED) which it then placed amidst investors with the expectation that the CDO would explode -- which it did.  Carried to its logical conclusion, the SEC's Complaint depicts the Defendants as financial suicide bombers on Wall Street. 

To the extent that the Complaint finally pulls back the curtain and lets the investing public see the shenanigans that truly go on behind the scenes, it is a welcome development.  At some point, if the SEC's allegations are to be believed, you just have to wonder if anyone at GS&Co ever asked when "enough" is "enough." This gold-standard of Wall Street, this financial powerhouse is charged with structuring a product that was allegedly constructed with the belief that its components were doomed to fail, and, worse, that GS&Co did not fairly warn the buyers to which it marketed Abacus that it was an inherently flawed product.  Worse, GS&Co is accused of double-dipping to the detriment of those purchases -- of catering to a powerful hedge fund, of profiting on the sale of Abacus, and of profiting on its own plans to short the subprime market.

One note of caution, just as we need to be attentive to "Too Big to Fail," we also need to consider "Too Stupid to Remain in Business."  The SEC must be careful that in punishing GS&Co, if that be the intent and eventual outcome, that those supposedly sophisticated financial institutions who stupidly bought Abacus and the other exotic garbage then available for sale are not rewarded by the equivalent of an insurance policy.  There was far too much available market information when Abacus was being marketed to permit anyone who bought the CDO to suggest, now, that they were unaware of the negative analysis or growing chorus of naysayers.



Special Report: Sweethearts in Crime by Matthew Goldstein (REUTERS)

Jeffery Stone and his wife Janette Diller Stone, one-time operators of a now-defunct New York investment firm called Crescent Fund, are not on any government most wanted list. And they aren't exactly hiding, either. But the former Greenwich, Connecticut, residents owe U.S. regulators nearly a half-million dollars in fines and restitution for their part in a five-year-old penny stock manipulation scheme.

Read veteran Wall Street reporter Matt Goldstein's provocative take on this story:



RRBDLaw.com: New FINRA Cases Analyzed by Bill Singer

Regulatory lawyer Bill Singer has analyzed and posted the latest crop of FINRA disciplinary cases.   

  • If you want to steal a half a million bucks from a bank, just write "At the Customer's Request" on a deposit slip.  Think I'm kidding?  CLICK HERE.
  • These bank cases are getting annoying -- I mean, c'mon now, it can't be that easy to steal money -- can it? Read about one enterprising employee who embezzled $1,452,158, and then enjoy a hilarious Woody Allen clip. CLICK HERE
  • How about the broker how sold $2.5 million of promissory notes to individuals, for which he received commissions of approximately $157,000. His investors ultimately lost more than $2.2 million of the $2.5 million that they had invested. CLICK HERE
  • You heard about the Merrill Lynch caper that seems straight out of a Marx Brothers' movie?  Ya got yer disappearing facsimile machine. Ya got yer lawyer who's not a lawyer but has a business card that says he is. Ya got some odd shenanigans involving the Office of General Counsel. CLICK HERE
  • What's up with Equity-Indexed Annuties (EIA)?  Looks like FINRA is cracking down. Read these cases for guidance. CLICK HERE