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SEC charges Goldman Sachs with fraud

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(Fortune) -- The Securities and Exchange Commission on Friday charged Wall Street's most gilded firm, Goldman Sachs, with defrauding investors in a sale of securities tied to subprime mortgages.

The SEC said it charged New York-based Goldman (GS, Fortune 500) and a vice president, Fabrice Tourre, for their failure to disclose conflicts in a 2007 sale of a so-called collateralized debt obligation. Investors in the CDO ultimately lost $1 billion, the SEC said.

http://money.cnn.com/2010/04/16/news/compa...ndex.htm?hpt=T1

Just in time. Well this just stresses the urgent need to stop obstructing and resisting our Great President's financial reform package. We can't let, to quote Barack, "an unfettered market" get away with increasing inequalities. This is what happens when you let capitalism get out of control. Whatever we do, let's just not ask questions about Timothy Geithner or Ben Bernanke role in any of the bailouts. It was necessary. They were too big to fail. Let's support Main Street and break up the banks or nationalize them.

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The SEC strikes again! Ever since the SEC was formed, just after the Great Depression, they have been trying to lull investors into complacency. They're responsible for the production of 2-inch think volumes of disclaimers that obscure the truth rather than highlight it. The facts in this case will come out in court, but I wouldn't be surprised if this is a case of caveat emptor. In any business transaction, it is important to understand the legal status of the other party, because the majority of people giving one "advice" are also selling something. Some people seem to think the salesman has a fiduciary duty to them!

Edited by softwareNerd
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The SEC strikes again! Ever since the SEC was formed, just after the Great Depression, they have been trying to lull investors into complacency

Even worse than complanency, the SEC led retail investors to slaughter with this one. This has partisan interests written all over it. The fact that the "Insecurity and Change Commission" announced the charges during market hours without suspending GS shares from trading hammered retail investors' positions.

A question on the topic. The SEC charges that

Tourre was principally responsible for ABACUS 2007-AC1. Tourre devised the transaction, prepared the marketing materials and communicated directly with investors. Tourre knew of Paulson's undisclosed short interest and its role in the collateral selection process. Tourre also misled ACA into believing that Paulson invested approximately $200 million in the equity of ABACUS 2007-AC1 (a long position) and, accordingly, that Paulson's interests in the collateral section process were aligned with ACA's when in reality Paulson's interests were sharply conflicting

Let's assume for a second that this is true and that investors in ABACUS, rather than the SEC brought the suit forward. If GS told ACA that Paulson was long on the CDO when he was in fact short, and ACA gave the CDO the seal of approval, was fraud committed, and if so who bears the responsibility?

EDIT: Grammar

Edited by LeoPTY
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Let's assume for a second that this is true and that investors in ABACUS, rather than the SEC brought the suit forward. If GS told ACA that Paulson was long on the CDO when he was in fact short, and ACA gave the CDO the seal of approval, was fraud committed, and if so who bears the responsibility?
When I posted originally, I did not know that someone from Goldman actually lied in this way about Paulson's involvement; I thought Goldman merely hid Paulson's role.

If this is true, and if it was done purposely with an intent to deceive, it is surely unethical. I don't know if it would rise to fraud. I assume that to be open to damages, the plaintiff would have to convince the court that this lie was material to their decision to buy (but, I'm not a lawyer). If they can show this, I'd be happy to see Goldman pay appropriate damages. (I assume that the Goldman employee who lied can legally be held to be acting as Goldman's agent at the time.)

I suspect that Paulson's interest could not have been an overriding factor influencing the buyer. For instance, I doubt it could have been more important to buyer than the rating given by the ratings agencies. Those guys probably cannot be sued anyway. (That's another place the government is responsible for this mess: by giving its blessing to certain ratings agencies.) Was their assumption about Paulson's involvement what pushed them over into being buyers? Would they have not bought if they had not been told this? Those are for a court to figure out.

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Interesting to note Goldman's side of the story:

http://www2.goldmansachs.com/our-firm/pres...c-response.html

Goldman Sachs Makes Further Comments on SEC Complaint

April 16, 2010

New York, April 16, 2010 - The Goldman Sachs Group, Inc. (NYSE: GS) said today:We are disappointed that the SEC would bring this action related to a single transaction in the face of an extensive record which establishes that the accusations are unfounded in law and fact.

We want to emphasize the following four critical points which were missing from the SEC's complaint.

. Goldman Sachs Lost Money On The Transaction. Goldman Sachs, itself, lost more than $90 million. Our fee was $15 million. We were subject to losses and we did not structure a portfolio that was designed to lose money.

. Extensive Disclosure Was Provided. IKB, a large German Bank and sophisticated CDO market participant and ACA Capital Management, the two investors, were provided extensive information about the underlying mortgage securities. The risk associated with the securities was known to these investors, who were among the most sophisticated mortgage investors in the world. These investors also understood that a synthetic CDO transaction necessarily included both a long and short side.

. ACA, the Largest Investor, Selected The Portfolio. The portfolio of mortgage backed securities in this investment was selected by an independent and experienced portfolio selection agent after a series of discussions, including with Paulson & Co., which were entirely typical of these types of transactions. ACA had the largest exposure to the transaction, investing $951 million. It had an obligation and every incentive to select appropriate securities.

. Goldman Sachs Never Represented to ACA That Paulson Was Going To Be A Long Investor. The SEC's complaint accuses the firm of fraud because it didn't disclose to one party of the transaction who was on the other side of that transaction. As normal business practice, market makers do not disclose the identities of a buyer to a seller and vice versa. Goldman Sachs never represented to ACA that Paulson was going to be a long investor.

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When I posted originally, I did not know that someone from Goldman actually lied in this way about Paulson's involvement; I thought Goldman merely hid Paulson's role.
From Goldman's response, they are claiming that they never represented that Paulson was going long on this, nor did they hide his involvement. It'll be interesting to see what the facts turn out to be.
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Yeah, it's kind of hazy right now what happened, but the timing of this is utter BS. With regard to whether or not disclosure of Paulson's position ABACUS would have been a deciding factor in investment, I would agree that it was a moot point. Investors going long on the CDO and Goldman thought that whoever was short was a fool.

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You can read the actual Goldman offering here:

http://www.scribd.com/doc/30036962/Abacus-...ipbook-20070226

Clearly these were investments designed for and sold to highly sophisticated fixed income investors. The CDOs in the investment were Baa2 rated by Moodys, which is near the bottom of their ratings for investment grade debt.

This case could drag on for many months and even more potentially damaging is the fact that the Europeans are getting ready to jump on the bandwagon:

http://www.reuters.com/article/idUSN1813967320100418

The Euros would like nothing more than to cripple Goldman and other US investment banks so that the business gets done overseas rather than in NY.

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Funny, but isn't that the same goal of the US govt?

Perhaps. I'm not sure what their goal is at this point. My first impression is that they're using these fraud charges to create a fall-guy so that they can gain greater control over the entire financial sector. You know.....never let a good crisis go to waste.

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Then there's this: The White House bought from Google the search terms "goldman sachs sec" so that when searched, a link to barackobama.com would appear with the words "Help Change Wall Street" each time.

President Obama is bringing his war on Wall Street to the enemy's turf.

He'll make his pitch for financial reform in the heart of lower Manhattan Thursday - even as his team make hay of the Goldman Sachs fiasco with a tech savvy appeal to Democratic donors.

Internet surfers who entered "Goldman Sachs SEC" into Google were directed to the president's campaign Web site via a sponsored link titled "Help Change Wall Street."

The White House's political arm paid for the keywords -- but would not say how much.

Read more: http://www.nypost.com/p/news/national/dem_...O#ixzz0lgRkZRqI

Edited by 2046
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I don't really see how fraud was involved. If someone can spot that a stock is going to plummet or that it is overly priced, then it is right for him to short the stock. Even though it was shorted,shorting alone doesn't drive down the price,as far as I understand, it just means that someone was set to make out if it did go down.The market is full of plays like this where people hedge it will go up at the same time they hedge that it will go down.I don't see anything immoral or illegal with what was done, though someone who knows more about the market might chime in and let us know more of the details. There were very few people who correctly predicted the sub-prime mortgage collapse.Seems like everyone had their head in the sand thinking it was going to boom forever. Of course, the government played a bigger role than any of the Wall Street guys, since they were forcing banks to deal with sub-prime mortgages in the first place. It was the government that was in fact engaged in fraud, not the wise investor.

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When I see news stories like this:

Goldman Sachs is launching an aggressive response to its political and legal challenges with an unlikely ally at its side — President Barack Obama’s former White House counsel, Gregory Craig.

http://www.politico.com/news/stories/0410/...l#ixzz0lh57ldRe

Now that Goldman is being advised by a man who has access to the highest levels of the Obama administration, it makes me wonder if this isn't really just a sham prosecution. I won't be surprised if the case ends in a "slap on the wrist" fine for Goldman and no damage to anyone of any importance. This appears to be more of a ploy to create a political atmosphere ripe for Obama's version of financial "reform", than a legitimate case of fraud.

Edited by gags
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  • 2 weeks later...

Oh my, what a shock! Now it looks as though Goldman may just write a check to put the whole thing behind them:

LONDON (Reuters) - Goldman Sachs may soon settle its fraud case with the U.S. regulator, the New York Post reported on Thursday, opting to end a legal fight rather than endure a repeat of the public flogging it received this week.

The Post report, citing sources familiar with the matter, said Wall Street's top investment bank was mulling closing the fraud case with the U.S. Securities and Exchange Commission (SEC) to limit damage to its reputation.

"It's almost a certainty that there will be a settlement," the paper quoted a source as saying.

http://finance.yahoo.com/news/Goldman-set-...set=&ccode=

Not to be a tin-foil hat wearing conspiracy theorist, but after Blankfein said that he supported the Wall Street "reform" package, this whole thing started to stink. Does anyone else get the impression we're being manipulated? :rolleyes:

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Not to be a tin-foil hat wearing conspiracy theorist, but after Blankfein said that he supported the Wall Street "reform" package, this whole thing started to stink. Does anyone else get the impression we're being manipulated? :rolleyes:

Of course we are. Do you know how many Goldman Sachs officials work for the Obama Administration? Read this to get just a tiny glimpse.

They were going to settle all along. It is a round-about way towards nationalization and redistribution, orchestrated by many high-ups in Goldman Sachs.

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