Newswise — Charles K. Whitehead, Associate Professor at the Cornell University School of Law and former associate in a law firm representing Goldman Sachs, comments on the strength of SEC charges of fraud in a civil complaint against Goldman Sachs.
He says:
“The case is not a slam dunk. The SEC needs to prove, first, that Goldman’s failure to disclose hedge fund manager John Paulson’s involvement rises to the level of fraud, and second, that Goldman’s statement that the portfolio was selected by ACA Capital Holdings, as portfolio selection agent, was materially misleading.
“Recall that the ABACUS purchasers were sophisticated financial institutions capable of making their own assessment of the value of what they were buying. Whether or not hedge fund manager Paulson was involved should not have been important to them, but that is what the SEC will need to prove in order to prevail. In particular, it’s not uncommon for clients of a broker-dealer to have completely opposite views over the value of the same assets. It happens daily.
“If, instead of creating a synthetic Collateralized Debt Obligation, Paulson decided to sell the identical assets to Goldman Sachs, and Goldman Sachs had then sold the portfolio to the ABACUS investors, would Goldman Sachs have been obligated to disclose that Paulson was the seller? No – in fact, doing so would have been a breach of confidentiality. But that is, in substance, what occurred here. It’s also unclear how involved Paulson really was. The SEC’s own complaint suggests that ACA rejected over half of the initial assets that Paulson hoped to include. So long as the final decision rested with ACA, which appears to have been the case, Goldman has a strong argument that Paulson’s involvement was secondary.
“The SEC, in this post-Madoff era, is to be commended for renewed efforts to oversee Wall Street. Less obvious is whether this lawsuit was the right one on which to bet its reputation as an effective watchdog.”
RSS