10 Things You Don’t Know (or were misinformed) About the GS Case
I have been watching with a mixture of awe and dismay some of the really bad analysis, sloppy reporting, and just unsupported commentary about the GS case.
I put together this list based on what I know as a lawyer, a market observer, a quant and someone with contacts within the SEC. (Note: This represents my opinions, and no one elses).
Ten Things You Don’t Know (or were misinformed by the Media) About the GS Case
1. This is a Weak Case: Actually, no — its a very strong case. Based upon what is in the SEC complaint, parts of the case are a slam dunk. The claim Paulson & Co. were long $200 million dollars when they were actually short is a material misrepresentation — that’s Rule 10b-5, and its a no brainer. The rest is gravy.
2. Robert Khuzami is a bad ass, no-nonsense, thorough, award winning Prosecutor: This guy is the real deal — he busted terrorist rings, broke up the mob, took down security frauds. He is now the director of SEC enforcement. He is fearless, and was awarded the Attorney General’s Exceptional Service Award (1996), for “extraordinary courage and voluntary risk of life in performing an act resulting in direct benefits to the Department of Justice or the nation.”
When you prosecute mass murderers who use guns and bombs and threaten your life, and you kick their asses anyway, you ain’t afraid of a group of billionaire bankers and their spreadsheets. He is the shit. My advice to anyone on Wall Street in his crosshairs: If you are indicted in a case by Khuzami, do yourself a big favor: Settle.
3. Goldman lost $90 million dollars, hence, they are innocent: This is a civil, not a criminal case. Hence, any mens rea — guilty mind — does not matter. Did they or did they not violate the letter of the law? That is all that matters, regardless of what they were thinking — or their P&L.
4. ACA is a victim in this case: Not exactly, they were an active participant in ratings gaming. Look at the back and forth between Paulson’s selection and ACAs management. 55 items in the synthetic CDO were added and removed. Why?
What ACA was doing was gaming the ratings agencies for their investment grade, Triple AAA ratings approval. Their expertise (if you can call it that) was knowing exactly how much junk they could include in the CDO to raise yield, yet still get investment grade from Moody’s or S&P. They are hardly an innocent party in this.
5. This was only one incident: The Market sure as hell doesn’t think so — it whacked 15% off of Goldman’s Market cap. The aggressive SEC posture, the huge reaction from Goldie, and the short term market verdict all suggest there is more coming.
If it were only this one case, and there was nothing else worrisome behind it, GS would have written a check and quietly settled this. Their reaction (some say over-reaction) belies that theory. I suspect this is a tip of the iceberg, with lots more problematic synthetics behind it.
And not just at GS. I suspect the kids over at Deutsche bank, Merrill and Morgan are working furiously to review their various CDOs deals.
6. The Timing of this case is suspect. More coincidental, really. The Wells notice (notification from the SEC they intend to recommend enforcement) was over 8 months ago. The White House is not involved in the timing of the suit itself, it is a lower level staff decision.
7. This is a Complex Case: Again, no. Parts of it are a little more sophisticated than others, but this is a simple case of fraud/misrepresentation. The most difficult part of this case is likely to turn on what is a “material omission.” Paulson’s role in selecting mortgages may or may not be material — that is an issue of fact for a jury to determine. But complex? Not even close.
8. The case looks thin: What we see in the complaint is the bare minimum the prosecutor has to reveal to make their case. What you don’t see are all the emails, depositions, interrogations, phone taps, etc. that the prosecutors know about and GS does not. During the litigation discovery process, this material slowly gets turned over (some is held back if there are other pending investigations into GS).
Going back to who the prosecutor in this case is: His legal reputation is he is very thorough, very precise, meticulous litigator. If he decided to recommend bringing a case against the biggest baddest investment house on Wall Street bank, I assure you he has a major arsenal of additional evidence you don’t know about. Yet.
Typically, at a certain point the lawyers will tell their client that the evidence is overwhelming and advise settling. That is around 6-12 months after the suit has begun.
9. This case is Political: I keep hearing that phrase, due to the SEC party vote. It is incorrect. What that means is the case is not political, it means it has been politicized as a defense tactic. There is a huge difference between the two.
10. I’m not a lawyer, but . . . Then you should not be ignorantly commenting on securities litigation. Why don’t you pour yourself a tall glass of STF up and go sit quietly in the corner.
I have $1,000 against any and all comers that GS does not win — they settle or lose in court. Any takers? My money is already in escrow — waiting for yours to join it. Winnings go to the charity of the winners choice.
>
Previously:
Questions Surrounding the SEC’s Litigation vs Goldman (April 17th, 2010)
http://www.ritholtz.com/blog/2010/04/questions-sec-litigation-vs-goldman-sachs/
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April 23rd, 2010 at 7:26 am
11. CNBC’s Steve Liesman has taken over the role Charlie Gasparino used to — he appears to be the official designated spokesperson/leakee for Goldman. I find this sort of access Journalism contemptible, but thats just me. It also says some negative things about Charlie’s career move — Fox Biz may not garner enough ratings to waste a leak there.
April 23rd, 2010 at 7:28 am
http://www.bloomberg.com/apps/news?pid=20601039&sid=aE6bRM.nVqns
Big Bank Breakup Time Gets a Boost From Goldman: Simon Johnson
Second, whether the SEC prevails in court, to mainstream opinion the case confirms – in excruciating detail – what Senator Kaufman, Democrat from Delaware, has been arguing for a considerable time: There is fraud at the heart of Wall Street.”
I think they settle. No way they want anymore dirty laundry aired in public.
April 23rd, 2010 at 7:46 am
I’d take the bet, but I don’t want to tie my money up for months or years to make 100% return while AMZN, AAPL, PCLN, NFLX and CMG will triple, and total p.o.s. stocks like C, ABK and PIR will go up 5x , thanks to the “liquidity” from the Fed and Goldman’s own front-running HFT algos !!
April 23rd, 2010 at 7:55 am
“The Timing of this case is suspect”
What I can’t figure out is why nobody asks Darrell Issa, Orrin Hatch, etal when they think the suit should have been filed. In a couple of weeks, congress would have been debating reform and the timing would still be “suspicious”. In a couple of months, the midterm elections will be fast approaching; I’m sure that the timing would have been called political had the suit been filed in the Summer or Fall. It certainly would have been called a diversion had the suit been filed during the health care debate. So, when would the timing have not been suspect?
April 23rd, 2010 at 7:56 am
Interesting GS is using a reporter with the name Lies-man.
April 23rd, 2010 at 7:57 am
“..really bad analysis, sloppy reporting, and just unsupported commentary about..”–BR, above
that’s really, the m.o./’meal ticket’ of the MSM, no?
seriously, has there been an Issue, within anyone’s memory, that they’ve, actually, led on–with the Facts?
http://www.tvnewslies.org/html/explanation.html
~~
past that, nice post, BR .. maybe, if a few others chose to, actually, care to fisk the *Truth of such matters, the MSM wouldn’t have such an easy time misleading its audience..
April 23rd, 2010 at 8:00 am
[...] 10 things you may have wrong about the Goldman/SEC flap. (TBP) [...]
April 23rd, 2010 at 8:01 am
I’m not disagreeing with anything you said, but the $1,000 bet is silly. You have to define more clearly what a win is. Now that the SEC has filed, there is probably a 90% chance that it goes to settlement – even if GS feels they could win in court, I doubt any competent attorny would advise that. If it does go to trial, that means either GS is even more arrogant than we thought (not likely), or the SEC feels its open and shut and wants a definitive W.
So just because there is a settlement, doesn’t mean GS loses.
April 23rd, 2010 at 8:02 am
But it means I win the bet !
April 23rd, 2010 at 8:03 am
A tall glass of STF up – love it. I can not imagine why the press feels the need to defend Goldie -it’s truly perverse
April 23rd, 2010 at 8:11 am
GS has lost already, even if they win (or settle) the suit based on legalese, even though I would agree that Paulson’s role was material no matter how you slice it. (With all those pages of disclosure, how did they miss that little detail?) Damage to reputation, etc. Plus the noise and bad press around the enforcement action in my view increases odds of more restrictions on derivatives, and the market reaction across the sector may have as much to do with that as with threat of more lawsuits.
April 23rd, 2010 at 8:11 am
strong post Barry. If you are right about the larger outcome, CNBC’s dedicated on-air support of the management and practices that led to a huge mess will burn its assumed credibility once and for all. The painfully obvious waffling of positions has been messy and transparent. The anti-blogger cable network is being cleanly outdone by those they’d rather disregard.
April 23rd, 2010 at 8:13 am
This is a perfect example of WHY this is the first blog I come to. AN accurate analysis and the truth laced with FACTS & keen perspective.
To all of you haters….well, John Stewart can tell you what to do!
April 23rd, 2010 at 8:15 am
I’m not a lawyer but I do have experience in what happens to people and organizations when the tide of public opinion turns against them and their power base wanes. There will be a feeding frenzy of attacks by those who believe they have been wronged once they become confident they can do so without retribution. Don’t think Goldman is there yet but at the rate they are going it may be coming soon.
April 23rd, 2010 at 8:18 am
Great post, hope someone takes you up on the bet.
April 23rd, 2010 at 8:42 am
My only beefs with this case:
1. The timing of the case. As in: “What the hell took so long?” Wall Street is rife with corruption and insider dealing, and it took this long to come up with just ONE case?
What the hell does the SEC do all day? Sit around looking at porn?
2. Why can’t this case also be used to go after the ratings agencies at the same time? Or, if there isn’t enough evidence in this particular case to go after the ratings agencies, why not find a case that could have pulled the ratings agencies into court on the same case?
3. If the SEC believes that this is a strong case with strong evidence, then they should not settle. Do not allow Goldman off the hook by letting them write a check “with no admission of wrongdoing.” I want to see the SEC force those SOB’s to admit that they committed fraud, even if it means that GS pays only $1 in restitution, but a lifetime of penalty in lost business.
April 23rd, 2010 at 8:46 am
Sure, agree 100%… GS settles, pays a sub-$100M fine.
This is a WEAK case. Its was only voted 3-2 to actually prosecute at all. It hinges on the verbal(?) of a low level employee who appears to be denying that and Paulson says “everyone knew we were short” and it strains credibility to think people did not understand the basic structure of a “synthetic” CDO. (someone HAD to be short, right? thats the whole point!).
It is the classic awful case — “because bad things happened, we must prosecute”. There is zero evidence of any malice or intentional misleading. There is zero evidience of systematic issues. This is a tiny deal for Goldman. This is one of 100s of similar securities bought by the affected parties. The SEC has nothing else (they always break THE big case first, see Raj).
Finally – this is 1/100th the case that was brought against GeneralRe in the AIG earnings manipulation.
GeneralRe — that’s one the largest divisions of BerkshireHathaway — the CEO lost his job and was found guilty in that case. Why the huge sensationalism around some VP at Goldman being the subject of an SEC action on a $25M deal for GS?
~~~
BR: You up for the bet?
April 23rd, 2010 at 8:51 am
From:
http://www.sec.gov/news/press/2009/2009-31.htm
as follows:
Since 2004, Mr. Khuzami, 52, has been General Counsel for the Americas at Deutsche Bank. In that role, he has supervised more than 100 lawyers supporting the bank’s various businesses in the Americas, and has overseen Americas-based litigation and regulatory enforcement actions. From 2002 to 2004, he served as Global Head of Litigation and Regulatory Investigations for the bank.
Hmmm.
April 23rd, 2010 at 9:06 am
BR-
great post- your description of Robert Khuzami does indicate that he is indeed a “bad ass”-
love the way you finished it up – regarding the “layman’s view” from financial pundits-
“I’m not a lawyer . . . Then . . . Why don’t you pour yourself a tall glass of STF up and go sit quietly in the corner.”
that gotta good laugh out of me:D
it appears your “lawyering skills” give you some advantages-
http://www.youtube.com/watch?v=u5wmParkppw
April 23rd, 2010 at 9:15 am
I should have mentioned: We have no position in Goldman Sachs, nor do our clients.
April 23rd, 2010 at 9:16 am
“… Goldman lost money on the trade…” they were hedged “elsewhere.” Otherwise they would have lost hundreds of million on hundreds of deals.
“… this is how the bond markets operate…” No, this is how salesmen operate.
“…our clients support us…” wait until the investment committees weigh in.
“… doesn’t bode well for Charlie’s career…” The only people with a brain watching Fox are the writers for the Daily Show.
April 23rd, 2010 at 9:17 am
I’m with CasualObserver: This is an example of why this is the only blog I read religiously multiple times a day.
whydtinigo raises a very interesting question: “why the press feels the need to defend Goldie”. The press seems to primarily lick the rear ends of people in power and my best guess as to why is that (like most of us) they are mostly looking out for their own personal careers and are very careful not to say anything that would make the powerful too angry at them. Most of them don’t want to get a rep as a “populist” (or worse). It takes absolutely no guts at all to side with the Lloyd Blankfeins of the world and, indeed, if you get a rep as a relatively widely attended media type, like Charlie Gasparino or Jim Cramer, you might even get special access to vital bits of information that the Big Boys want you to broadcast to the public. (I think it was in Sorkin’s book TBTF that I read how Fuld et al had Cramer up to Lehman’s posh offices to see if they could enlist his help.) Recall how much “special access” those reporters–who would spread the Bush administration’s propaganda supporting a war against Iraq– received.
It is the Khuzamis of this world who are rarer than hens’ teeth. Hurray for Mary Schapiro and the Obama administration for having the courage and good sense to appoint this guy. And many, many thanks be to Khuzami who could likely make a zillion times what he makes working for you and me, if instead he worked for Wall Street or big corporations – or the Mob for that matter.
April 23rd, 2010 at 9:18 am
You forgot one thing… federal courts have over a 90% conviction rate at trials. I am not saying they are right this 90% time, more likely the jury thinks the government can do no wrong (they forget that gov and workers have agendas – more convictions more promotions).
Weather this fact if right or wrong, its going to be a long, long road for GS… I don’t think your going to find a very un-bias jury pool. So, I think these guys will settle and pay whatever amount so long as the principals can stay out of the country club jail. I personally believe they are guilty and the only offer of settlement from the gov should involve lots and lots of jail time, then tell GS – see you at trial!
April 23rd, 2010 at 9:19 am
I am a lawyer, but not one with expertise in securities law and litigation–you should have qualified the STF to any lawyer not practicing in the field.
That said, I will mostly STF, except to say, my lawyer spidey sense tells me that Mr. Ritholtz is correct on all counts and that this is a huge case, if for no other reason than it represents the first real stab at questioning the legitimacy of investment banking’s money streams. When the government wins (and it ought be considered that the government might not wish to settle–it takes two to tango), the reverberations will be huge, politically and financially.
I do think the most interesting aspect of this case is the political ramifications of the government turning on its overseers. It’s almost like a slave revolt or something. Lead us to the promised land, Mr. Khuzami.
April 23rd, 2010 at 9:32 am
Maybe the Money Honey will take you up on the bet. Many, many people need to STF.
I hope that Khuzami sets a new example certainly looks like he has the mettle.
April 23rd, 2010 at 9:33 am
Barry, i think i found a person who will gladly take your bet:
http://finance.yahoo.com/tech-ticker/maria-bartiromo-on-goldman-case-where%27s-the-fraud-472525.html;_ylt=AshUUjRzNZ7vkpvF5tbe5Yq7YWsA;_ylu=X3oDMTE2ZXJuYW9mBHBvcwMxMQRzZWMDdG9wU3RvcmllcwRzbGsDbWFyaWFiYXJ0aXJv?tickers=gs,xlf,^dji,^gspc,bac,c,aig&sec=topStories&pos=9&asset=&ccode=
ok, on second thought, i’m sure you already knew that…
April 23rd, 2010 at 9:34 am
BR,
People that call this a weak case are likely a) either long GS and want to dump shares, b) have friends who are long GS and want to dump shares, or c) are on the GS payroll. I get a chuckle how CNBC has so quickly become the mouthpiece for GS via Steve Liesman’s consistent voicing GS’s latest trial balloon defense theories and leaks. I find it refreshingly reassuring that the SEC continues to keep mum. It would seem that if they felt anything that GS has floated in the media would imapct the case they’d be leaking stuff in response. It would appear that GS knows their goose is cooked.
April 23rd, 2010 at 9:42 am
“… doesn’t bode well for Charlie’s career…” The only people with a brain watching Fox are the writers for the Daily Show.
OK, that was actually funny for once VD
April 23rd, 2010 at 9:43 am
“”whydtinigo raises a very interesting question: “why the press feels the need to defend Goldie”.”
Look at who owns the press and your question will be answered.
April 23rd, 2010 at 9:49 am
then of course- we have this-
“Maria Bartiromo on Goldman case: Where’s the fraud?”- Tech Ticker
well BR- can you match wits with the likes of Maria Bartiromo? I hear she is pretty smart- a “Rocket Surgeon” or something along those lines- lol
April 23rd, 2010 at 9:52 am
“What the hell does the SEC do all day? Sit around looking at porn?”
Actually, yes.
http://news.yahoo.com/s/ap/20100423/ap_on_bi_ge/us_sec_porn
April 23rd, 2010 at 9:55 am
Add Henry Blodget to the list of people who are dead wrong and should STF up about the legalities
http://finance.yahoo.com/tech-ticker/there%27s-a-rebellion-inside-the-fed-as-fears-grow-bernanke-will-spark-high-inflation-472830.html
April 23rd, 2010 at 9:55 am
“What the hell does the SEC do all day? Sit around looking at porn?”
Why, yes, yes, they did!
http://abcnews.go.com/GMA/sec-pornography-employees-spent-hours-surfing-porn-sites/story?id=10452544
~~~
BR: And Donna, what exactly does that have to do with whether or not Goldman committed fraud?
I don’t understand the point of your reference — unless you are only looking for things that confirm your belief government can accomplish nothing?
April 23rd, 2010 at 9:57 am
Great, clear, straight up post.. Thank you!
April 23rd, 2010 at 9:57 am
[...] The Big Picture: 10 things you don’t know(or were misinformed) about the GS case [...]
April 23rd, 2010 at 9:58 am
Well done, BR! Cognos, STFU!
April 23rd, 2010 at 10:00 am
Cognos should go work for CNBC. For all I know, he probably is a regular contributor. Would fit in well with that crew.
April 23rd, 2010 at 10:07 am
Also, the people who are defending the Squid are likely banking insiders who are so cocooned in their own little bubble Wall Street, and have been doing shady things their whole lives (and justifying them to themselves) to make their millions, so they’ll never ever come to see just how ethically bankrupt (and in many cases, fraudulent and criminal) those actions were and still are……..It’s just not in their DNA.
April 23rd, 2010 at 10:08 am
Would love to take the bet (I am on Goldman’s side, not because I think they did the right thing, but because I think the SEC’s case is weak). Only one problem: the decision to settle is often driven by financial or other concerns, not necessarily because one side “lost.”
April 23rd, 2010 at 10:09 am
@ Barry Ritholtz Says: April 23rd, 2010 at 9:55 am
you just got pulled over by the wrong link police again. I hate ratting you out but you’re a wall street guy
April 23rd, 2010 at 10:11 am
Barry,
I agree with your points. I haven’t seen Liesman’s reporting on this (I generally watch the Opening Bell and then switch to MSNBC), but he seems fairly balanced most of the time. Is it that he’s an economist and not a lawyer (or rather, legally minded)? I don’t think one has to be a lawyer to understand legal issues, but one does have to be legally minded–ie you can reduce arguments to their essentials, you understand the importance of precedent and judicial procedure, and you can see how a simple line of reasoning can be used to achieve various outcomes in various scenarios. I’ve found that most people aren’t legally minded.
Second question: Are you willing to accept chickens against your bet? After all, if Republican Nevada Senatorial candidate Sue Lowden has her way, we’ll scrap the health reform law in favor of a system of barter for medical care. So if we lose, can we pay the bet in chickens?
http://www.youtube.com/watch?v=qZezfjWox5s
April 23rd, 2010 at 10:11 am
One day BR it is going to be some really weird porn in that wrong link and then it is all over man….all over.
….and it’s going to be the fans. The ones who actually click on your links
April 23rd, 2010 at 10:14 am
I also check in numerous times a day. Thank you for concise info. I have been deeply disillusioned with the main stream media since I spent hours years ago screaming at my tv “trusted news personnel”, about those WMDs. Remember them? 4th estate , my ass.
April 23rd, 2010 at 10:15 am
So if GS offs Obama and we go through another Kennedy thing is that technically a loss on that bet of yours?
Did you calculate for that in the risk/reward scenario? It could skew your numbers quite a bit
April 23rd, 2010 at 10:16 am
@f411: Liesman and “economist”? Really? As someone who puts a lot of credence in academics, for the sake of consistency, I would think you’d do your homework on that one like you did when you ripped Tiabbi’s credentials apart. Liesman was an English major, I believe. He’s no more trained to be an “economist” than my dog is, but no matter – he shills for your hero, so he’s a “good guy” in your eyes.
April 23rd, 2010 at 10:18 am
Hey Cognos – the sky is blue! You are really becoming quite predictable…still enjoy reading your posts and watching you crawl under everyone’s skin.
April 23rd, 2010 at 10:18 am
Posts like this one are the bomb. BR gets his New York on. You could write for the Daily Show. Nothing like a finely tuned bullshit detector and the simmering sense of outrage to state the case point by point.
April 23rd, 2010 at 10:21 am
@phb: Cognos owns GS stock so there you go. He’s even admitted that (to his credit).
April 23rd, 2010 at 10:21 am
@Mannwich
Considering the fact that the best and brightest trained economists created this mess, do you really think that having an economics pedigree is in any way helpful when it comes to understanding economic issues?
April 23rd, 2010 at 10:25 am
BR,
Re: #3 and 10(b)-5
Mens rea is not required but at least a strong inference of scienter is. ;-)
BTW, has anyone EVER taken you up on your bet challenges??? Maybe if you handicapped the odds of settlement vs. trial verdict you’d get some takers.
~~~
BR: Hey, John Paulson isn’t the only guy who knows how to stack a deck!
April 23rd, 2010 at 10:25 am
@f411: That’s not my point. I’m not at all someone who cares about pedigree, but some of your comments here have indicated that it is YOU who cares about that. I couldn’t care less about it. Just pointing out the apparent contradiction in your stances on it.
April 23rd, 2010 at 10:25 am
I use Maria Bartiromo as a contrarian indicator. If she thinks that the SEC doesn’t have a case (did she get an A in clairvoyance?), then I’d double down on Barry’s bet. Maybe she’s been on the GS corporate jet and been briefed on defense and she thinks she has some special insight given her degree from Harvard Law. Oh, wait. She doesn’t have a degree from Harvard Law. As Emily Latilla used to say on SNL, “never mind.”
April 23rd, 2010 at 10:30 am
BR…the only thing I would be worried about if I were you, is the possibility if this goes to trial, Blankfein will probably subpoena God to testify about doing His work. I could see that swaying the jury.
April 23rd, 2010 at 10:34 am
This is fantastic.
http://www.nakedcapitalism.com/2010/04/e-mails-from-mordor.html
April 23rd, 2010 at 10:36 am
@Mannwich – I don’t fault anyone for owning the teflon-like GS! I mean even the allmightygreatoz himself, Mr. Buffet owns quite a few shares.
April 23rd, 2010 at 10:39 am
@Mannwich
Yes, but Liesman went to Columbia for his master’s in journalism–one of the premier journalism schools in the world. Taibbi has a BA from Bard College, which I never heard of until I looked him up! There’s a world of difference between a journalist from Columbia (Liesman) and a fiction writer from Bard College (Taibbi).
April 23rd, 2010 at 10:43 am
This is a case of jealousy among the gods. Government thinks it is god. Goldman thinks it was doing god’s work, which it has now been informed is not coincidental with doing the god of government’s work. Who knows who’ll win in the end–not just the case, but the claim of deification. Expect lots of earth-quakings and thunder-rumblings.
~~~
BR: No, this is is a simple case of a broker/salesman who violated securities law when selling a product by lying. It is not a Greek epic, just a weasel who got caught in a fib.
April 23rd, 2010 at 10:46 am
@phb: That’s not my point either. My point is cognos is “talking his book”. Consider why he’s defending them. It’s in HIS own interests that they come out of this unscathed and even more powerful.
@f411: And your point is? If highly-trained economists steered us into this mess and didn’t have a clue while regular schmucks could see there was a problem, you don’t think that folks like Taibbi could be a better “journalist” (real “journalism” requires some integrity and balls to challenge authority, which Liesman seems to be in short supply of) than an establishment suck-up and hack like Liesman? Please. One doesn’t need a Master’s degree from Columbia in Journalism to do what Taibbi does. Why do you think the blogosphere is so popular today? They are filling the void left by the completely soulless, captive MSM, many of whom have the lofty pedigrees like your hero Liesman. Your hypocrisy is unreal.
April 23rd, 2010 at 10:51 am
@f411- the Bard kids love to have dreadlocks, hang out at the burrito stand and the air always has a “funny perfume” to it. It is by far, very liberal, very expensive and located near the moonies. Funny, they are not a rowdy bunch especially compared to the Marist drinking crowd down the road a piece. Also if you are a Steely Dan fan you would have heard of Bard.
April 23rd, 2010 at 10:53 am
Kudos to you f411 for your honesty. Personally, I would be embarrassed to admit I had never heard of Bard.
April 23rd, 2010 at 11:00 am
@Transor: But you’re a New Englander, where pedigree still matters culturally. So it’s only natural that you’d know that. ;-)
People outside of the East coast aren’t as in tune to the whole rich kids prep school and and uber-elite private liberal arts colleges culture. And I can say that as a born and bred New Englander and someone who grew up in the blue collar town next door to THE Groton School.
April 23rd, 2010 at 11:07 am
@Mannwich: Yes, pretty much surrounded by the private boarding schools in this area, but you know quite a few of us local blue collar families grow up and do OK . We watch the weekenders come up and drain themselves keeping up with all the social stuff they really have to do . Huge keeping up with the Smiths etc. Polo, tennis, golf and fox hunts. They run around all weekend and do you think they ever really relax? I’ll take my 30 some acres in the woods upstate any day over that.
April 23rd, 2010 at 11:09 am
@Mannwich – we agree. I was attempting to point out that lots of deep pockets want to see GS have their hand slapped for being bad boys, but then fully support them on the other side. Perhaps it is believed that GS can take the punishment and vehementization, yet still survive the damage in fine form for the next battle. Politics is indeed at play here, despite what many believe, but GS will not go down over this, in fact they could become this centuries Joe Kennedy as “reform” is created.
April 23rd, 2010 at 11:13 am
Barry, good morning.
Not a securities lawyer but fraud is pretty generic.
To your point #3, the loss of the $90 mil is a straw man no doubt. But fraud does require a mens rea because its elements are: a statement of material facts about past or present conduct, occurrences or transactions; which is false; which is known to be false when it is made; which is intended to induce reliance in its hearer; which the hearer is entitled to believe is true and on which the hearer relies to his detriment. And I know you know that, you just are not as pedantic as some. Can’t take the bet based on the application of the elements above. It’s a slam for a prosecutor with any experience because the discovery has already been done.
Best regards,
RF
April 23rd, 2010 at 11:13 am
Couldn’t agree more, Lariat1, but living out in the Midwest, it’s refreshing how little pedigree really matters here. My next-door neighbor is a local who went to Harvard for his MBA, but the other neighbors here who’ve lived here longer than we have and have known him for a long time never knew that. Bottom line is pedigree’s not important here, even though there are some very smart, highly educated people, so people don’t talk about, generally. On the east coast, it always comes up in conversation somehow. I don’t miss it.
April 23rd, 2010 at 11:16 am
Reading this blog, I get the feeling the Mr. Ritholz thinks Government Regulation can actually work over the long term, which to me is just asinine as it is clear that it does not. So, while I am happy someone is finally going after this organization known as Goldman, I sure hope Mr. Ritholz also feels that the biggest fraud currently being administered is the Fed itself and that it should be dismantled.
Also, anyone who doesn’t feel this is politically motivated is also the same type of person who thinks we are in Iraq for our own safety and not the fact that their is oil over there. There’s elections coming up and the top worry of voters is Government Corruption. THIS IS POLITICALLY MOTIVATED, but I’ll take it as it is needed.
April 23rd, 2010 at 11:34 am
The legal issues in this are fairly simple for even a novice or a casual observer of securities law to comment on.
Why is there this attack on people that are analyzing the legal issues and siding with Goldman? You act like there aren’t even any facts or factors that could possibly exonerate Goldman or at least weaken the SEC’s case. I’ve been reading all the attorney arguments in favor of the SEC and on its face it looks like a slam dunk (point 1) but dig down and what makes Paulson’s involvment material? Yeah, this SEC guys is top notch, but you think Goldman’s attorneys completely suck? Goldman is like Al Queda and the Mafia? For some reason, I think those may have been a little easier to prosecute.
The SEC better have a real smoking gun on this “equity position” Paulson had. I see a few blurred lines such as “Transaction Sponsor” and “selected” and other words in the complaint that make a case, but this IS a serious charge and it appears to have been tied together with a few loose threads (and out of context emails).
One guy on here compared the whole thing to some unsuspecting shopper buying Pintos after a mechanic gave them a one over. Really?
So if David Einhorn goes to Goldman in early 2007, says he wants to bet against financials, then Goldman finds sector expert ACA willing to buy financials, Einhorn and ACA discuss which to include and exclude with ACA having the final say, Einhorn gets in AIG, C, LEH, BSC, WM etc and excludes GS, JPM, BAC and even informs ACA he is going short, then ACA agrees to the fund, Goldman wraps up a nice ETF bomb, some other ETF rating company rates it as wicked smaht, ACA sells a 2 year put to Einhorn for additional income/return and the steaming pile of ETF gets shoveled over to ACA, IKB and GS going long too, then the whole thing blows apart in 2008 and Einhorn collects his winnings.
You’re telling me Einhorn’s initiating the entire transaction because he wants to go short is material to everyone that purchases the ETF? Good luck on that case. And don’t try to say that I spinned the facts because if you read the complaint more than once, that is exactly how the SEC explains it.
NOW, if Fabulous F-up really did state that Paulson was going to buy $200 million, then there may be something there.
As for the bet, I picked up a measley 10 shares of GS on Monday at $160 just for fun after reading all the legal issues over the weekend (betting on a no admission of wrong doing settlement). This was before I heard both Goldman’s and Paulson’s version of events.
April 23rd, 2010 at 11:38 am
Love it, especially #10. Thanks BR.
April 23rd, 2010 at 11:38 am
@Mannwich, finally last year took 4 plus weeks and drove w/ camper out west. Best vacation ever had in my life. Didn’t even make it to California but did most National Parks. Awesome and you are right about the people. We would have long conversations with locals everywhere, campgrounds, shops, gas stations. Generally much more laid back and respectful of people in general. As much as I love New England , everyone agreed, including two fifteen year old boys, that we left our hearts in Wyoming.
April 23rd, 2010 at 11:44 am
@Manny:
Except Bard’s in NY, dude. And “Taibbi” isn’t exactly a Brahmin last name!
April 23rd, 2010 at 11:51 am
[...] Ten things you don’t know about the Goldman Case. (Big Picture) [...]
April 23rd, 2010 at 11:53 am
@Transor: NY and NE have the same obsession with pedigree. Same thing. I’ve lived in both places so I can make that claim! But Taibbi’s dad was a connected exec in NBC, no?
April 23rd, 2010 at 11:55 am
@Transor: Yea but in that area of NY, it’s on the north west border of CT and MA and all that money that resides there.
April 23rd, 2010 at 11:57 am
No bet.
FAS says that they will settle.
Politics (3-2) says they will settle.
The fact that Lord Blankfein runs the government and the SEC is essentially a Goldamn Sucks subsidiary and desperate for a reputation enhancement, says they will settle.
Setting the trash can on fire down the street from the bank to be robbed says they deserve a far more onerous law suit (s) for far more egregious fraudulency (which will happen when Bernie Madoff gets a call to run the Vatican hedge fund).
And as much sense as it makes to prosecute GS, for any number of crimes, as the writer says above, it would be easier to prosecute the Mafia, and when did common sense ever prevail at an arm of the Federal Government?
April 23rd, 2010 at 12:09 pm
Alea is concise and clear as usual.
http://www.aleablog.com/abacus-for-dummies/
Something worth reading before any accusations/counters are made.
April 23rd, 2010 at 12:10 pm
@Lariat1: Precisely my point. A distinction without a difference. I lump the two together for that reason.
April 23rd, 2010 at 12:51 pm
Paul Jorion (blog in French…sorry)
http://www.pauljorion.com/blog/?p=10340
argues that American authorities are usually more decisive when foreign banks are involved.
China with Fanny and Freddie and France with Societe Generale-AIG.
The Royal Bank of Scotland, now owned by the British government (85%) lost $840m in this particular case.
Could we see Paulson dragged in the suit and made to repay some of those ill gotten gains?
April 23rd, 2010 at 12:57 pm
nice
i was long big GS fri Ouch! now i am short.
one thought. liklihood goldman only made the $15 mio on paulson commission and lost $80 mill+ is near zero. to believe they did not make further spread and did not partially hedge overall subprime with ABX or other is absurd.
April 23rd, 2010 at 1:12 pm
I’ll take this $1000 bet if a GS/SEC settlement “without admission or denial of liability” (or equiv language) is deemed a draw. Find me on Twitter if you want.
April 23rd, 2010 at 1:17 pm
Is the withholding of material information from a rating agency a violation of 10-b5?
Moody’s Analyst: Didn’t Know of Paulson Role in Abacus
http://online.wsj.com/article/SB10001424052748703709804575202092972748792.html
April 23rd, 2010 at 1:40 pm
BR,
Nice list. I am less inclined to believe that this is political theater, but I am a cynic when it comes to all things government related. So, will there now be any criminal prosecutions? I doubt it.
Regards,
TDL
April 23rd, 2010 at 1:44 pm
The SEC complaint exhibits minimal understanding of finance and makes disingenuous and misleading arguments, which is why many are not disposed to give the SEC the benefit of the doubt as you appear to be.
April 23rd, 2010 at 1:44 pm
Also, when I see the SEC going after mutual fund managers, pension fund managers (particularly public fund managers), and boards of directors for their negligence then I will have more faith that the SEC is trying to make right. I do not believe this will happen regardless of the merits of the head of the enforcement division.
Regards,
TDL
April 23rd, 2010 at 2:06 pm
This is a case of jealousy among the gods. Government thinks it is god. Goldman thinks it was doing god’s work, which it has now been informed is not coincidental with doing the god of government’s work. Who knows who’ll win in the end–not just the case, but the claim of deification. Expect lots of earth-quakings and thunder-rumblings.
~~~
BR: No, this is is a simple case of a broker/salesman who violated securities law when selling a product by lying. It is not a Greek epic, just a weasel who got caught in a fib.
~~~
That was mostly just a joke, although you’re right–it would make a nice plot for a Greek tragedy. But it is more than just a salesman violating a securities law. The SEC has a good case, but they always have lots of good cases from which they could choose. There’s no shortage of nefarious financial conduct to which prosecutorial discretion can be appled. That they decided to prosecute this case against these defendants has profound political implications, although it’s hard to tell what exactly they are at the moment, mostly because we have no way of knowing precisely what drove them to decide this case was worth prosecuting. Time will tell. The fact that Goldman seemed caught completely off-guard (if their surprise wasn’t just an act) tells something of the nature of the decision, but things will get clearer in the fullness of time.
April 23rd, 2010 at 2:15 pm
Thank you for this Barry.
The spin and disinformation is coming in hot and heavy and people love to repeat sound bytes.
“jesse”
April 23rd, 2010 at 2:22 pm
Goldman’s chief executive visited the White House at least four times.
Read more: http://www.mcclatchydc.com/2010/04/21/92637/goldmans-connections-to-white.html#ixzz0lwtIqsJX
So you are telling me they were discussing holiday plans!?!?
April 23rd, 2010 at 2:27 pm
Like other comments before mine, I come here a few times a day for columns just like this — the kind that think. That’s so rare among MSM, precisely because they have corporate puppet masters, with CNBC being the poster child.
April 23rd, 2010 at 3:01 pm
Thank you, thank you, thank you, thank you!
April 23rd, 2010 at 3:04 pm
Please. Let’s see more of these legal observations. This stuff is so remote from normal folks (sorry), we really can’t be faulted for watching with a “yeah right” attitude.
Do you think there is any chance we’ll see more competence coming to the SEC?
April 23rd, 2010 at 3:07 pm
And all those dreams of Goldmanites hanging from light poles :) There may indeed be justice.
Your post made my day. Thanks for a great weekend.
April 23rd, 2010 at 3:12 pm
If somebody takes the other side of your bet before midnight and lets you keep the 90% settlement lock as a Win for you and = Loss for GS, I’ll wax your car if you are within 5 mi of Sag Harbor the week before Memorial Day..however if the bet fades to naught and only finds the other side as a 1,ooo bet against your “lose in court”, you buy me dinner at a worthy place and I’ll tell you about a possible 10-bagger I got working that you have not heard of.
April 23rd, 2010 at 3:13 pm
[...] Ritholtz has a good post on the Goldman case. In it he describes Robert Khuzami, the former prsecutor now running the [...]
April 23rd, 2010 at 3:25 pm
http://www.cyberbee.com/yesteryear/oz_37.mp3
April 23rd, 2010 at 3:26 pm
[...] 10 Things You Don’t Know (or were misinformed) About the GS Case By Barry Ritholtz – April 23rd, 2010, 7:15AM [...]
April 23rd, 2010 at 3:31 pm
I am amazes by all the airplay the “sec porn” story is getting today. The story has been around for months. The fact that Repub. are running around today making a big deal about some porn watching in an organization as large as SEC…and it mostly happened during BUSH admin!…show the level of desperation and pro GS complicity….and the media for that matter!
Thanks Barry!
April 23rd, 2010 at 3:59 pm
Very active thread…
There once was an industry which did nothing illegal, sold a product sanctioned by the US Congress, was regulated heavily by numerous US government agencies, had been in business successfully for well over a century. The market leader of this industry was the single largest US taxpayer — ever.
The industry was accused of wrong-doing, of not “telling the truth” about the product they sold.
After USJD got done with them, they settled with the attoneys-general of 48 US states for over $200 Billion. And radically changed their business practices, marketing approaches and plenty more, too.
It’s a good example of what can happen when “society” changes its views on something.
I’m sure you’ve all heard of cigarettes, Marlboro and Philip Morris and the tobacco industry. No body “likes” the tobacco industry, but about 25% of the adult population in the US smokes cigarettes everyday. The relevant document is the “Master Settlement Agreement of 1998.”
Bad things can happen when “the people” turn against you. Nearly everybody knows somebody who got sick, with tobacco use being a major contributing cause. An Aunt, a grandparent, a friend’s mom or dad. Or even a spouse, or brother, or sister, or friend.
You know anybody who didn’t lose money in the stock market in 2008?
Populism? Sure.
If Iwere Lloyd, and I’m not, the first phone call I’d make would be to Geoffrey Bible, the former Chairman of Philip Morris, and get a good earful about what can happen when things go badly wrong. Then I’d hang up the phone and call the SEC and ask them what they want — and whatever the SEC said they wanted, I’d put it in a box with a ribbon and deliver it to the SEC personally.
.
April 23rd, 2010 at 4:12 pm
Thank you, Barry!
In the coming days/weeks, the MSM desperation for ginormous, bloody headlines will distract them, they’ll rush to cover another event/calamity/situation, where they can inflate its historic implications to attract sheep eyes and simplify it terribly so they don’t glaze over. Keep doin’ what they should have but couldn’t have.
April 23rd, 2010 at 5:29 pm
If the SEC settles without an admission of wrongdoing it will be a travesty. As a former NYC PR guy in financial services, I shudder to think of the consequences of letting them skate. They will be doubly emboldened to just keep cheating, and keep spinning, without any fear that it will ever catch up to them.
April 23rd, 2010 at 5:35 pm
@lugnut: This was over the past five years. Since the SEC did nothing at all during the Bush administration, who can blame them for biding their time looking at porn? Of course, “porn” as loosely defined, means they missed the real porn while they were looking at cyber-porn.
April 23rd, 2010 at 6:40 pm
B.R. by K.O..
Cognos hangs up his gloves. Probably had stomach cramps from too much Kool Aid.
April 23rd, 2010 at 6:41 pm
The prospectus is out… And it indicates that there was no equity investment in the deal, precluding the possibility that ACA/Germans thought anyone was investing in the equity when they bought the deal, including Paulson.
We’ll drink the tall glass of STF up when you put down the meatball hero and learn about synthetics.
http://www.scribd.com/doc/30414220/ABACUS-Offer-Document
April 23rd, 2010 at 7:10 pm
The CNBC touting the innocence of poor little Goldman is sickening, no wonder Dylan Rattigan left. I often wonder, do they actually believe the lies they spout, or are they ALL that ignorant.
Here are a couple of links to other opinions on the case, sorry in advance if these have already been posted. The writer has had a major run in with the lead prosecutor in the case, and says that Richard E. Simpson is a pit bull not to be messed with. Once he decides to take a chunk out your trousers, he will not let go. After reading about him; Simpson, I sure as hell wouldn’t wanna mess with the man!!!
http://whitecollarfraud.blogspot.com/2010/04/did-clever-sec-bait-goldman-sachs-into.html
http://whitecollarfraud.blogspot.com/2010/04/goldman-sachs-tells-more-bull-to.html
April 23rd, 2010 at 7:59 pm
Barry,
Nice run down. No argument from me about the importance of the case. Your bet, on the other hand:
There are three possible outcomes – Fly (Not Guilty), Fry (Guilty), or Settle (Pay Fine). Basically, you want somebody to give 2 to 1 on a grand? Oh Brother…
They are going to settle. The only real question is if the amount they have to pay is going to be disclosed.
April 23rd, 2010 at 10:05 pm
IMHO – it is this kind of post when you are at your very best, BR.
April 23rd, 2010 at 11:20 pm
[...] Bet $1000 against Barry Ritholtz that Goldman will get off on securities fraud charges (Big Picture) [...]
April 24th, 2010 at 2:11 am
[...] Fun With Vampire Squids: Perspectives on SEC v Goldman Top Ten Things You Don’t Know About the Goldman Case [...]
April 24th, 2010 at 7:51 am
Several other Wall Street players were involved in the same fraud as
Goldman…thus they stand to lose if Goldman does…which may go a long
way toward explaining why they support Goldman!
April 24th, 2010 at 9:08 am
I’ll take the other side of a bet with you Barry. I”m VERY TEMPTED to take the other side of the bet you proposed, but I want to make it a bit more fair. You want to win in dozens of scenarios, and give the counterparty only one scenario in which to win. You’re proposing a bet that is more one-sided than what GS and Paulson were accused of doing.!
Seriously, I strongly believe that if you were to isolate the bet to “they go to trial and Goldman gets convicted (or whatever it is in a civil trial) of intentional fraud”, I would gladly take the other side of that bet. If there is a settlement, then each of us gets our money back.
And here’s another important aspect of it. The regulation you cite has two different types of fraud. YOu mention the intentional type of fraud. But there is another type of fraud, and I do think GS could get nailed on this one. It’s “operates as a fraud”.
What “operates as a fraud” means is, that your marketing pitch gave someone the wrong impression about the investment, even though you didn’t mean for the customer to have been misled. An example would be that you have created a prospectus for an offering. You started distributing them to prospective clients, and then found that a couple of pages of risk disclosure were missing. It was a printer error, not an intentional error. But the result was that the customer didn’t have all the facts. So it’s considered fraudulent. And it’s covered in the 10b-5 rule in paragraph (c).
I do think that GS could get nailed for 10b-5(c) non-scienter fraud, but not 10b-5(a) or (b) fraud, which are intentional.
So Barry, right back at you. If you want to bet that Goldman and the SEC go to trial, and you win only if Goldman loses at trial and gets convicted of 10b-5(a) or (b), then I’ll put up $1,000 and take that bet. We could even make it so that if they settle, then $1,000 of my money goes to your charity, and $1,000 of your money goes to my charity.
April 24th, 2010 at 9:56 am
Did you also run interference during the Jones obstruction scandal, or were you too young in those days? What I can’t figure is why you guys do this for free. Guess its sort of a religious thing. This is a sucker bet. Goldman has to “lose” for the Obama regime to save face. It will be done in a way so that nobody’s hair gets mussed….don’t worry….even the pro-little o’ media shills will be able to say “I told you so”, so open up an SFT (whatever the hell that is) and relax…..you don’t need to get this excited.
April 24th, 2010 at 10:46 am
Barry,
Your the lawyer. What am I missing?
Player A comes into a casino and bets on RED. Player B bets on BLACK. The next roll comes up BLACK. Does Player A have a case against the casino because they didn’t inform them that there was Player B on the opposite side of the bet? What if Player B was notorious for winning on BLACK?
[BR: What you are missing is that unlike Casinos, the sale of securities cannot be accomplished by fraud or material misrepresentations or material omissions. Say whatever the hell you want when selling used cars; Say the same lies while selling securities, and the SEC is up your behind]
Certainly nobody would think so, and CDO’s are very different than betting in a casino. CDO’s do have 2 positions much like a casino bet though, and to suggest that one party wouldn’t inherently know that the other side is taking a polar opposite view of the value of the CDO is naive at best.
Why would it matter who chose the underlying instruments in the CDO? It is presumed that the buyers of the product had just as much skill in assessing the underlying assets as the other side. Specifically that was their jobs to do just that. If for some reason the real estate market hadn’t tanked when it did, would the plaintiff’s still have a case? It seems more like the loser’s of this bet are avoiding looking at their own failures, their inability to predict the real estate market, and their desire to make what many thought was easy money collecting these CDO premiums.
The perceived value of any CDO (or other asset backed security) comes in being able to accurately model the cash flows of the assets, and to understand the structuring of these cash flows as described in the instrument. The opinion of the seller of the underlying assets is not material to these cash flows. Furthermore anybody on one said of this complex transaction would know one thing for sure. The other party would have an opposing position.
Another point, ACA, another buyer of the CDO was actively involved int he selection of the underlying assets. If the value of these assets does in fact rise and ACA makes a profit, does Paulson then have a case against Goldman for fraud as well?
Both the buyer and seller were involved in selection of the CDO assets. Both parties assumed the onus of understanding the value of these assets.
These were (or should have been) informed professional parties involved int his transaction. Why is this any more complicated than buyer beware?
Please comment:
~~~
BR: What don’t you understand? There are specific laws (Securities Act of ’33 and ’34) that Fab seems to have violated.
April 24th, 2010 at 11:40 am
Okay this is a strong case.
Why are criminal fraud charges not being brought then?
It is either that they do not want to file showing preferential treatment towards Wall Street royalty or they really need the lower standard of evidence that the civil court affords them.
This case should be in criminal court.
April 24th, 2010 at 12:51 pm
@JSchmid Says: April 23rd, 2010 at 2:22 pm
Goldman’s chief executive visited the White House at least four times.
Uh oh!
That’s all we need is BHO standing up, biting his lower lip and telling us he did not have sex with that CEO! :shock:
April 24th, 2010 at 1:34 pm
Barry – I’d love to chat and compare notes. I agree with your thoughts and want to add color from a guy who was in the STF business at the time but has no legal insider info.
2. Agreed about Prosecuter. His one black eye is overseeing the legal dept. at DB who was doing the same crap as Goldman. Maybe he didn’t know it so I’ll give him the benefit of the doubt.
3. Goldman says it lost $90 million dollars, but paid the Vice President banker a $2 mm bonus for the Abacus deal (internal memo per WSJ). Hmmmm….doesn’t add up. Usually one is fired for losing money, not paid handsomely. My was only about 30 years old. Maybe HE didn’t know better but his management should have had better judgment.
Legally, Paulson lost all his equity (just like GS lost $90 mm) Outside the deal, Paulsen made close to $1 billion with his short bets. I suspect that’s EXACTLY what occurred with GS. Remember – GS reported record profits – it wasn’t from being long its CDOs – it was shorting mortgages big time. This is a tiny, legal technicality that they “lost” money. Get real — can’t believe the press hasn’t put 2+2 together on this defense which is so weak and so deceiving and flimsy.
4. ACA was known as the dumbest money on the street. The only dumber players were the rating agencies being coerced by ACA, but mostly, coerced and even threatenned by the like of GS, DB and others. ACA is worthless — gone, done, toast — in run-off and blew up years ago due to taking a role in the crap. Everyone knew ACA was dumb money, especially Goldman. While an “active” participant, they were duped and the credit quality of tyhe assets just the rating agencies and sized up as sucker by all the banks and by GS in particular. They are not innocent, but were clearly too dumb to know what was going on. And this was being done at a junior level – none of “details” ever made it to senior management or senior credit committees. So he said what to whom when is pretty irrevelant at this point. Trust me — aAnd I may be a lawyer.
5. This was only one incident: Not. Agreed – tip of the iceberg. I suspect the kids over at Deutsche bank, Merrill and Morgan are working furiously to review their various CDOs deals – all true and agreed. As for Goldman, then you have Greece, the anger of helping tank IKB (owned by the German gov’t) and all one needs to do is read the WSJ to find more. And to boot, most GS profits are from proprietary trading all while as a banking holding co. gaining access to the fed to borrow at 0%. A monkey could make money with this model. The should IMMEDIATELY lose their “banking” status or immediately no longer be allowed to trade unregulated derivatives. And the idea GS is too important to fail? Get real. While I have a Citi credit card, an AmEx credit card, a Chase card, home equity loan and mortgage, what the hell has GS ever done for me or anyone else on this board. It shorted America and put us into a 2 year funk. The firm should be shut down on this fact alone. If this were in any other country, the top people at GS would be in jail already.
7. This is a Complex Case: Again, no. Agree. It sounds complex but it’s no different than betting on horses when you know the horses and no one else does.
8. The case looks thin: It’s not. Agreed for all your reasons and more.
I have $1,000 against any and all comers that GS does not win. I have a similar bet of $100,000 – not in escrow, but in puts on GS and DB and calls on AIG. I think AIG will be the biggest winner as all the suits play out and judges realize a tiny rogue group of traders got duped by GS and others, ruining the AIG franchise and costing the US taxpayers multi-billions. It’s time the tax payor gets his/her money back from Wall Street.
- New Money April 2010
April 24th, 2010 at 2:43 pm
“10. I’m not a lawyer, but . . . Then you should not be ignorantly commenting on securities litigation. Why don’t you pour yourself a tall glass of STF up and go sit quietly in the corner.”
So I guess anybody who isn’t a lawyer shouldn’t comment about any case anywhere. Only lawyers should be allowed to comment on any legal action.
April 24th, 2010 at 6:42 pm
You won’t get many takers BR because it’s a silly bet for even odds. Most cases get settled. This will NEVER see a courtroom, so you’re not really going out on a limb there.
I’ll one up you and LAY 3:1 odds that GS will either lose or settle. So, to win $1,000 on your same bet, I’ll risk $3,000.
If you do get any takers, you can ARB me for a huge spread!
April 25th, 2010 at 1:12 am
On Charlie Rose April 20 David Boies says based on the complaint, the case is weak, no law was broken. He says these cases are settled either early or late, seldom during.
http://www.charlierose.com/view/interview/10973
April 25th, 2010 at 2:05 am
I am far more persuaded by Mike Lewis than the Boies “what we see is weak”
April 25th, 2010 at 5:37 am
[...] the People v. Goldman Sachs: Is this the truth about the case? If so, it looks [...]
April 25th, 2010 at 10:36 am
Well, Barry, I am not a lawyer, but this was not a vanilla public offering, and expertise in securities laws (which btw in this case would be regulation AB, which is much more recent than acts of ’33 and ’34) is not necessarily sufficient to form a solid opinion on this matter. So, forgive me, but based on what you’ve written so far, it is not clear to me that you qualify ;)
I believe the materiality of specific disclosures depend to large degree on the details/practice of this specific OTC business (buying and selling protection on tranches of synthetic RMBS). Based on what I know about this business, I am pretty sure that honest opinion of any practitioner (and I am not one of them), including ACA and IKB, would be that the disclosure of Paulson role is not material. ACA was supposed to look at collateral, not listen to what others think about this collateral. IKB was satisfied that ACA looked at collateral, and decided to write supersenior protection. It is ridiculous to claim that the disclosure of a trivial fact that protection buyer participated in selection of collateral would change anything.
~~~
BR: Its not the omission of the Paulson role which is a slam dunk (I note its a question of fact for the jury)
Rather, its the claim that Paulson was long $200 million when he was in fact short (perhaps by an even greater amount) that is the material misrepresentation
April 25th, 2010 at 12:28 pm
[...] nine of the ten. I’ll let you read his blog to get the last [...]
April 25th, 2010 at 3:04 pm
Barry, I’ve read the SEC complaint, and found no evidence there that GS misrepresented Paulson role. It is possible (but in my view, unlikely) that they kept a real smoking gun undisclosed. However, the only “evidence” presented so far is an allegation that a cryptic reference to “precommitted” equity tranche in the abacus presentation somehow suggests (without saying it directly) to ACA that Paulson is buying the equity protection.
What is clear from the complaint, however, is that ACA met face to face with Paulson several times during the selection process. If his role was a material issue for ACA, surely they had several occations to ask him directly, no? Instead of relying on the above subliminal messages from GS?
Moreover, based on CBS reports, SEC is in possession of sworn testimony of Paulson’s Pellegrini (this is based on CBS reports) that he directy informed ACA that Paulson intends to go short.
Quote from the reports:
In one part of Pellegrini’s testimony, a government official asked him: “Did you tell (Schwartz) that you were interested in taking a short position in Abacus?”
“Yes, that was the purpose of the meeting,” Pellegrini responded. “How did you explain that to her?” the government official said. “That we wanted to buy protection on traunches of a synthetic RMBS portfolio.” Pellegrini said.
April 25th, 2010 at 7:20 pm
Barry no comment on why these aren’t criminal charges given that the case is so strong? I have no doubt that the case is strong. My doubts lay with the government just making headlines here.
Steal $20 three times in California and its 25 to life. Steal billions on Wall Street and its a fine.
I don’t believe one needs to be a lawyer to see something is fundamentally wrong with our justice system here.
April 25th, 2010 at 10:17 pm
it is interesting, that when responding to comment about David Boise view on the complaint (see above), Barry says:
“I am far more persuaded by Mike Lewis than the Boies”
Barry, how does this square with your “thing number 10″ we should learn about the GS case (ie, that non-lawyers should STF up on this issue)? As far as I know, it is David Boise who is an expert on securities laws, while Mike Lewis is just a mystery writer who has no idea what he is talking about.
BTW, whoever listens to Lewis’s current opinions, should read his Jan 2007 bloomberg article, where with the same zeal he derides “financial elites” for their stupid concerns about leverage, and lectures them on the benefits of securitization.
http://www.bloomberg.com/apps/news?pid=20601039&sid=aaagOLYMd4yg
April 26th, 2010 at 8:07 am
[...] This morning, I’m on Bloomberg TV, from 7:10am (to whenever) discussing the SEC vs Goldman Sachs case. [...]
April 26th, 2010 at 8:53 am
Barry, your article is an emabrassment to lawyers everywhere with its presumptiveness and the conclusory nature of virtually every sentence and drawing conclusions where none should be drawn (i.e., Khuzami is a ‘badass’ therefore Goldman is in deep do (tell that to Mark Cuban, who beat Khuzami’s charges)). You also assume that the SEC’s facts as stated are true, as no REAL lawyer would do on the basis that these are FACTUAL issues that would need to be determined at TRIAL.
How odd that you suggest that anyone who’s not a lawyer should STFU. Have you ever even practiced law? If so, what firm? Graduating from Cardozo law school does not make you a lawyer (which state bar did you pass?), and certainly doesn’t compel the conclusion that your analysis should be given any weight. You’re certainly not listed on the New York Unified Court System (as I’d expect someone who graduated Cardozo law school would be if they were actually a lawyer), as I am. You article is sensational at best.
Here’s the view of a REAL lawyer:
http://blogs.reuters.com/great-debate/2010/04/23/shorting-the-secs-case-against-goldman-sachs/
And analyses like that are all over. You article appeals to the lowest common denominator in the mainstream financial press. BS bloviating opinion at its finest.
~~~
BR: I assume you are aware that the sale of securities is governed by various SEC acts and laws, including 10-B5.
That rule states that seller of securities may not make material misrepresentations when pitching their products; i.e., Stocks cannot be sold like used cars.
The SEC complaint alleges that GS told potential buyers that a Paulson & Co., a major hedge fund, was long $200 million dollars worth of this product, when they were in fact short that much (if not more).
If you think that this is somehow not a 10-b5 violation, I’d like to see your analysis . . .
April 26th, 2010 at 10:59 am
[...] really should read this to understand a bit [...]
April 26th, 2010 at 11:21 am
@ojc [bumping from my response to you on the "Inside Baseball" Think Tank piece]:
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.
That’s a direct quote from allegation #4 of the complaint. And this from allegation #47:
On January 10, 2007, Tourre emailed ACA a “Transaction Summary” that included a description of Paulson as the “Transaction Sponsor” and referenced a “Contemplated Capital Structure” with a “[0]% – [9]%: pre-committed first loss” as part of the Paulson deal structure. The description of this [0]% – [9]% tranche at the bottom of the capital structure was consistent with the description of an equity tranche and ACA reasonably believed it to be a reference to the equity tranche. In fact, GS&Co never intended to market to anyone a “[0]% – [9]%” first loss equity tranche in this transaction. [emphasis mine]
ACA records referenced in allegation #51 support the complaint’s claim that ACA believed Paulson to be an equity investor.
What I am NOT saying: that everything in the complaint is gospel. There have been public statements attributed to Pellegrini that he told ACA flat out that Paulson was taking a short position. However, your statement that the SEC complaint does not accuse Goldman of lying is incorrect. The SEC is claiming (1) that Goldman described Paulson’s involvement in terms that could reasonably be understood to mean that Paulson was an equity investor, (2) that this is how ACA understood Paulson’s role, and (3) Goldman had a motive to lie in wanting to rope a manager/patsy/dumb-money front man into the Paulson deal, however you want to view it.
Is the SEC’s claim that Goldman lied, i.e., had the scienter to deceive a slam-dunk? I don’t think so, looking only at the complaint, which is all we have to go on right now. But on the face of the complaint, this is a permissible inference from the facts alleged. and the suggestion of intentionally misleading (AKA lying) is definitely there. Whether the SEC has the ammunition to support that claim with hard evidence remains to be seen.
April 26th, 2010 at 11:42 am
Barry that’s a factual issue, which is exactly what I was alluding to in my original post. Page 2 of the complaint states the fact that Tourre misled ACA into believing there was this equity position of $200 million, with flimsy supporting evidence, which is cited on page 14. The most you can glean from the complaint is that the term sheet indicated a [0]%-[9]% pre-committed first loss piece . This may lead someone to INFER that someone was assuming the residual risk, but it says nothing about a commitment by Paulson. If this case is built on inferences, it will crumble. While there are references to certain “conversations”, again, that is a factual issue, and assuming it’s not ruled inadmissible hearsay, will need to be weighed by the trier of fact to determine whether there was or was not a material omission. If it was just an oversight to fail to include more concrete evidence that ACA was actively misled, then I don’t have confidence in their case even if it is just a complaint (which I grant you usually contains more cursory information). If you look at the marketing materials (i.e., the transaction flipbook), it clearly states that the residual equity piece will not be sold or marketed which clearly indicates that there was NO residual holder or even if there were plans for one at some point in the past, there was none at the time the deal was marketed (which is after ACA should have selected the Reference Obligations). So at a minimum there are factual issues that need to be resolved, so your assumption that this is a slam dunk is hyperbole at best. Frankly, I don’t think the element of scienter is concrete enough based on this complaint, but that’s what jury trials are for.
Beyond that, then you get to the materiality issue, you have to determine that the relevant fact or omission would result in a SUBSTANTIAL LIKELIHOOD that a reasonable investor would have walked. Can you say that with any certainty based on what we know? And more importantly, you have to weigh materiality in light of the total mix of information available, the most important aspect of that total mix is the reference portfolio which ACA had full access to, vetoed certain securities out of and had final say on. In fact, the ACA selected securities performed WORSE than those selected by Paulson, which although doesn’t disprove or prove any allegation, is an interesting fact. And for the record, a synthetic CDO only works if someone is long and someone is short. There is a buyer of protection and there is a seller of protection. I documented deals like this and I have never EVER seen disclosure about who was on the other side of the trade. And if you have point me in that direction, because I guarantee you they don’t exist, which leads to the fact that materiality must also be weighed in the context of market practice.
Am I saying the SEC will lose? No, but I sure can’t be definitive as you because many questions remain and my personal view is that the case is weak, though with a jury trial anything can happen. Assuming there is no settlement, and assuming a finding of liability this will go to the Supreme Court because this area of the law is far from clear. Jury instructions in this case will be a HUGE bone of contention if it gets that far.
Could you also answer my question? I.e., you lied in your article stating you were a lawyer, when you never worked at any firm and neither did you pass any State Bar. It’s great that you went to law school, but don’t paint yourself as a lawyer whose opinion matters more (when you’re not even a lawyer to begin with). And I only raise this ad hominem because you did it first in your original post.
April 26th, 2010 at 12:01 pm
[...] his list of “10 Things You Don’t Know (or were misinformed) About the GS Case” Barry Ritholtz (www.ritholtz.com) opens with “……Based upon what is in the SEC complaint, [...]
April 26th, 2010 at 3:50 pm
I think you are fundamentally correct. My bet is on a settlement.
When I say this is a “weak” case I don’t mean the SEC can’t bring the case; what I mean is that it cannot meet the criminal (high) standard of “proof beyond a shadow of a doubt”. Instead they’re going for the civil (low, or weak) standard of “preponderance of evidence.”
The SEC stripped the case down to the barest bones and then asked for a jury trial in order to pressure GS. My bet is that this is pressure to settle – GS would have to be insane to let this come up in front of a jury now. Once the settlement terms come out I predict DB and the rest of the Street will be falling over themselves to voluntarily agree to whatever terms GS negotiates with the Feds because if GS’s hands are a tad grimy you can bet that others’ hands are positively black. The SEC picked on GS first I think not just to prove a point (though that’s part of it) but to have a partner with whom it could set a standard that everyone else will fall in line behind.
I think the agency learned something in dealing with GS over things like the AIG bailout, one of which is that (like it or not) GS sees itself as the gold standard for the Street. If someone else negotiates a deal there’s no guaranteed GS will buy into it. If GS negotiates it pretty much everyone else will agree that it’s the best deal possible, and fall in line.
The question then is what deal will come out of this and what impact will there be on CDOs in the future.
April 27th, 2010 at 2:30 am
Settlement or no settlement we’ve been duped again. For crying out loud; what did you expect, people? Anybody who has spent any time on Wall Street knows that you play the short. To not be able to play the short is cutting out half – if not more than half – of the Wall Street game…geeze…
There is way more culpability than what is being reported. DUHHHH. Bunch of old geezers playing the same old game and half the friggin comments here are in support of that…wake the f up, people.
Look…there is no question that Goldman played the short. They were expected to do just that. Pay the fines…send the whiners home. What are you going to do, SEC, et al?…put them out of business? When you bailed ‘em out and then some? It’ll never happen and these aren’t the heads that need to be rolling right now…just a friggin smoke screen as usual…
While we are all looking here…guess what else is happening? Oh…we’ll find out in a year or two. Anybody who doesn’t see this for what is is an ABSOLUTE MORON. A meteoric moron. This is the greatest cosmic clunker of the day…it’s a quick draw McGraw…a cool hand luke…a double down…a table full of shit wrapped with nice rose-scented bow for the American public to focus on.
April 28th, 2010 at 12:22 pm
[...] Here. (HT: Alvin Rabushka) Very informative. [...]
April 28th, 2010 at 9:06 pm
[...] You can read his blog post here. This post was reprinted with his permission. [...]
April 29th, 2010 at 12:07 pm
[...] cycle is churning out its typically tepid hogwash about the SEC’s suit against Goldman Sachs. The Big Picture skewers 10 myths about the case and gets to the heart of the matter: Goldman is screwed. Here’s why: [...]
April 29th, 2010 at 11:10 pm
What percent of these cases settle? 95%? Your bet suggests ‘not winning’ is 50-50, but that’s not true. The fact in dispute, that Goldman represented Paulson was an equity investor, is disputed. If it went to a jury, I would say Goldman has a 70% chance of winning. But given the other considerations, they will probably settle like most litigants do.
April 30th, 2010 at 1:34 pm
RE: MensRea
Way to shed some real light on this situation. Ritholz is pandering to the populace the same way the politicians do and I’m uncertain why. For him to “believe” the complaint as fact makes no sense at all. If all complaints were 100% true, everyone would be convicted or settle. I’m not an attorney but have other expertise in these areas, can sure read a complaint and am well aware of the “material misrepresentation” rule. His bet is also a sham. I would make the same bet even if I thought GS was 100% innocent, which no one knows at this point. Most all of these cases w/ the SEC are settled in some form or fashion in order to avoid either large attorney fees or even a slim possibility of a trial defeat. Barry, normally love your columns and comments. Back off a bit here until more facts come out.
April 30th, 2010 at 6:55 pm
For you to “DISBELIEVE” the complaint at face value reflects a lack of understanding of what goes into a complaint.
When a star prosecutor decides to take on the most powerful bank on the Street, do you think they shoot from the hip? Do you think after the bashing the SEC deservedly got over Madoff, that they are going to simply go off half-cocked at Goldman?
I rarely give a prosecutor the benefit of the doubt. (There is no greater abuser of power than a renegade prosecutor)
In this case, I deduce that the only way the SEC takes on GS is if they have volumes of evidence of what is alleged in the complaint. It is both career and political suicide otherwise…
May 1st, 2010 at 8:32 pm
[...] other sophisticated campaign contributors sought legal and political exposure to financial reform, civil action and criminal [...]
May 20th, 2010 at 10:12 am
You claim the investors thought Paulson was 200 million long in Abacus. Just curious when there was only 192million of bonds issued by Abacus that Paulson would manage to buy 200 million worth – especially after ACA and IKB bought all 192million. How did he manage to buy a non-existent FL or equity slice? This is off the actual prospectus for the deal not the flipbook and the other irrelevent shit the SEC posted.
As for the downside for the SEC? What would that be? GS has had its stock pounded and if the ratings agencies follow through on their threats to cut GS’s ratings then it is dead. It literally has everything to lose by fighting this case and nothing really to gain – given all the people who thought they are guilty will carry on thinking so no matter what – and the SEC have nothing to lose… Is it their money on the line? The SEC will go down in professionals estimation after hours of watching porn and failing to spot the largest Ponzi scheme in history?
Here is a bet i will take and if you are that confident you should take it too:
GS wins in court – I win, SEC, wins in court, you win, settlement – nobody wins. If you are that confident that this is such a slam dunk surely you believe the SEC will take it to trial and win that scalp!
~~~
BR: I don’t claim that, its what was alleged in the SEC complaint . . .
May 20th, 2010 at 12:29 pm
And yet you still think the SEC are credible? How does ACA or anyone else get to believe Paulson is buying a non-existent tranche?
PS this is the genius who decided to go for the case:
http://ftalphaville.ft.com/blog/2009/01/15/51220/madoff-finra-and-the-woman-who-would-be-sec-chair/
Given you think the person’s reputation is so important and no government official would dare take the slightest risk with it, I wonder exactly what your take on the SEC chief is?
October 19th, 2011 at 11:54 am
October 19, 2011
Wow, amazed at how wrong so many people were about this !