The response to my SEC v. Goldman: Regime Change or Crowd Control? http://www.brokeandbroker.com/index.php?a=blog&id=373 has been phenomenal -- and I thank all of you for your emails and phone calls. I am particularly appreciative for those of you who fully understood that I was not defending the alleged actions but merely providing a lawyer's professional analysis of the SEC's Complaint.
Those of you who know me know that I am a fervent supporter of the independent/regional brokerage community, a defender of defrauded investors, an advocate for the professionalism of the career of financial services providers, and an outspoken critic of ineffective and corrupt regulation. I have never been a fan of Goldman Sachs or its ilk and have regularly cited such firms as setting in motion much of the financial devastation that now surrounds us. But, please, do not ask me to jump upon the freshly painted bandwagon of SEC v. Goldman, at least not yet. As the case unfolds and more facts -- yes, "facts" -- are presented, then I may change my opinions as to the merits of the legal case. However, for now, I see far too much political theater masquerading as an oh-so-sincere and curiously timed Complaint.
Among the observations that I made in my BrokeAndBroker.com Blog of April 19, 2010,was this rumination:
Due Diligence Anyone?
In reading the SEC Complaint, I see the suggestion that Goldman "should have" volunteered information about Paulson's role (or that Goldman fraudulently covered up that role). On the other hand, did ACA or any purchasers directly contact Goldman and/or Paulson and ask whether Paulson had a role in selecting the portfolio components? Similarly, I see no inquiry as to whether Paulson was or would be adverse to ABACUS. Pointedly, in Paragraph 31 of the Complaint, the SEC states:
On January 27, 2007, ACA met with a Paulson representative in Jackson Hole, Wyoming, and they discussed the proposed transaction and reference portfolio. The next day, on January 28, 2007, ACA summarized the meeting in an email to Tourre. Tourre responded via email later that day, "this is confirming my initial impression that [Paulson] wanted to proceed with you subject to agreement on portfolio and compensation structure."
A lot of folks just didn't seem to catch that event. On January 27, 2007, ACA met with a Paulson representative -- and by that time, Paulson's distrust of the integrity of the subprime market was well known among Wall Street financial professionals. Don't forget that by the time of the meeting, Paulson is known as contemplating a subprime wipeout scenario. Did ACA confront Paulson with any concerns about the hedge fund's role in structuring ABACUS? Did ACA feel any discomfort about Paulson wanting to proceed with it "subject to agreement on portfolio . . ?" Why was it Goldman's obligation to provide ACA with information about Paulson when ACA was meeting with Paulson and could have (and should have) asked those same questions as part of its due diligence?
As time passes, it seems that many of my concerns and criticisms are becoming more valid. As reported by CNBC's Steve Liesman and written by Jeff Cox:
CNBC has examined documents in which a government official asked Pellegrini whether he informed ACA CDO manager Laura Schwartz about Paulson's position in the portfolio, named Abacus 2007-AC1.
"Did you tell her that you were interested in taking a short position in Abacus?" a government official asked Pellegrini, referring to the name of the CDO portfolio.
"Yes, that was the purpose of the meeting," Pellegrini responded.
Moreover, CNBC's Jeff Cox just posted a follow-up piece titled: Key Issue in Goldman Case: Was There Really Any Fraud: http://www.cnbc.com/id/36667165. Among the interesting issues that Cox explores is this:
Sticky and complicated as the case already sounds, legal analysts say the task for the SEC could be even harder.
The doubt centers on whether Goldman needed to tell investors who bought into the package of home loans that Paulson had helped select the securities and stood to benefit if they would drop in value.
After all, ACA itself made the final decision on what securities would be included in the CDO, called Abacus 2007-ACI. And as CNBC reported Wednesday, Paulson aide Paolo Pellegrini told the SEC that he had informed ACA that the hedge fund was shorting the securities (click here for story).
So where's the fraud?
"Right now this case is at a phase of chumming-taking all the bloody bait and tossing it in the water," said Bill Singer, of Stark & Stark in New York, a securities attorney with more than two decades of experience in securities fraud cases. "There's a lot of blood in the water and the commission has gotten the reaction it wants-self-serving reaction from Congress, consumer interest. As a matter of law...why the hell (does Goldman) have to tell them anything?" . . .
As I noted during my live appearance on April 20th on Bloomberg TV (In the Loop with Betty Liu), the SEC's cases are typically at their most potent within the minute when the Complaint is issued -- and their impact often is diluted as time progresses, the defense gets its position out, the various witnesses suggest their likely testimony, and key pieces of evidence become known. Clearly, the SEC is experiencing the negative effects of that syndrome. For a reference point, consider the recently dismissed case involving Bear Stearns' hedge funder managers Cioffi and Tannin (also a CDO fact pattern).
Critics of SEC v. Goldman see it as a cynical piece of political theater whose timing was calculated to promote the Obama Administration's Wall Street reform agenda. Supporters of the SEC's case see it as a much overdue expose of Wall Street's business-as-usual practices and as a timely warning to curtail the industry's unsavory ways. Regardless, virtually all legal Complaints overstate the case because they are advocating the claims of the Plaintiff. Moreover, just as typically, all legal Answers tend to understate the case because those pleadings are advocating the defenses of the Defendant. After all, our system of justice is an adversarial one.
My role as a legal/regulatory blogger is not to be a cheerleader for the regulators or the regulated. I simply try to deflate all the nonsense and to offer my insights. I await Goldman's Answer with my sharp pin and with an equal desire to pop the overblown rhetoric that will likely be contained therein.
The SEC's case against Goldman Sachs has lots of holes in it.
RRBDLaw.com: New FINRA Cases Analyzed by Bill Singer
Regulatory lawyer Bill Singer has analyzed and posted the latest crop of FINRA disciplinary cases.