When ever I write something up, I try to show how I reach my conclusion. What are the data, facts, underlying elements used to reach an ultimate decision. In math, algebra, it was called”showing your work.”

Sometimes, I don’t bother show the tiny details. I assume everyone knows 2+2=4, understand the basic aspects of the US Constitution, and is hip to Freud, Aristotle and McLuhan. Occasionally, this leads me to omit items that I erroneously assume everyone knows. The SEC vs Goldman was just such a case.

For those of you without the benefits of a legal education, or who do not remember their Series 7 tests, this is a refresher: Pay attention eejits, this is important:

Rule 10b-5: Employment of Manipulative and Deceptive Practices

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.”

This is why Goldman Sachs is going to have a hard time defending this case — the vilation of 10b-5 is blatant.

It is also why the 2 SEC commissioners who voted against bringing the case — Republican commissioners, Kathleen Casey and Troy Paredes — should be ashamed of themselves. If you have even a passing familiarity with Rule 10b-5 — say for example, you actually read it once — it is obvious that Tourre and Goldman violated this rule.

If you won’t vote for this enforcement action, than what would you vote for? Apparently nothing — and therefore you do not belong on the SEC.

Its time to demand these two Goldman Sachs suck ups resign their commission. They are unqualified and incompetent, and have no business being part of any field where understanding law or having judgment is involved.

Category: Derivatives, Legal, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

60 Responses to “Rule 10b-5: Manipulative and Deceptive Practices”

  1. TSC Industries, Inc. v. Northway, Inc.

    TSC Industries, Inc. v. Northway, Inc., the word “material” was defined by the U.S. Supreme Court – “an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.”

    426 U.S. 438, 449.

  2. Vicky Ward says:

    Goldman Sachs Alum Receive Threatening Phone Calls From Their Alma Mater

    By “they” I mean the Goldman alum who have acted as TV pundits, bloggers or commentators on the firm in the past three days. Over the weekend they received repeated phone calls from their alma mater telling them to desist.

    “Hey you’ll play fair, won’t you?” the voice from Goldman has said, “gently,” but according to one recipient ever so “slightly menacingly” over the phone.

    “I mean we did great business with your new firm, so you won’t be knocking us on TV, will you? You know we are the good guys….”

    Good guys? More like Goodfellas….

    One very indignant recipient of these calls phoned me Monday morning.

    “They’ve been calling me all weekend, gently pressuring me, trying to control what I say about the firm on television. They haven’t stated an overt threat but it’s like “little Brother” [as opposed to the dictatorial regime of "Big Brother" in George Orwell's 1984.]

    My source isn’t giving in. “I don’t do business with them any more, so I don’t care. I’m going to say what I think.”

  3. JasRas says:

    Yes! Let’s turn the rules enforcing agencies of our society into partisan forces just like every other disfunction part of D.C.

    The voting was right down party lines.

    What I’d like to see is a some of the larger endowments, foundations, and pension funds to immediately put out RFPs for any monies that Goldman is managing. There is very little the government can do (unless they eventually levy criminal charges) that can be a “life lesson” like the loss of AUM, fee’s, reputation, and bully pulpit.

    This whole thing will put a new meaning to “Ain’t nuttin’ but a G thang”–

    I love Goldman’s argument that is basically, The investors considering Abacus were highly sophisticated and had enough material facts to know what they were messing with…they had to know someone was taking the other side.—reminds me of quotes from “The Wire”–”Man, I don’t shoot at no one but playaz, and playaz know that’s the game. You play the game, you get got. I ain’t shootin’ no regular folk”….

    Goldman has degenerated to a bunch of high dollar suited street gangsta’s playin the playaz.

    A sad moment to have fallen all the way back to caveat emptor as the rule of the street.

  4. cognos says:

    I don’t get it. The broker does not, they CANNOT disclose “who” is selling.
    This is not a “material” investment fact. “Stevie Cohen is selling” – this is NOT disclosed.


    BR: Fabrice Tourre represented that John Paulson was investing $200 million into Abacus 2007. In fact, he was doing the opposite, and Goldman Sachs knew it. That is material misrepresentation.

    Read the complaint

  5. Marcus Aurelius says:


    You’ve forgotten the law that trumps all others: IOKIYAR.

  6. Moss says:

    The no votes is prove positive of how politics and perhaps ideology skew regulatory prudence. It is shameful that these people will abrogate their responsibility for reasons outside of their primary function. These people are dead set on upholding their belief that Government is ineffective by delivering on that promise when given the chance. Is it any wonder that trust in most institutions is waning?

  7. On Goldman

    The government is arguing Goldman committed fraud under the securities laws:

    (a) Use of interstate commerce for purpose of fraud or deceit
    It shall be unlawful for any person in the offer or sale of any securities or any security-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act) by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly—
    (1) to employ any device, scheme, or artifice to defraud, or
    (2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or
    (3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.

  8. troubled times says:

    Good post . Please send a copy to the SEC , Congress and the Whitehouse. lets see who ignores it the longest.

  9. [...] A reminder about that pesky little Rule 10b-5 as it pertains to L'Affaire du Fabrice.  (TBP) [...]

  10. Marcus Aurelius says:

    Regarding disclosure and the finer points of the scheme:

    Not having read the complaint beyond snippets and analysis presented here and at other blogs, but knowing enough of the ‘BIG Scheme to Defraud’ to see the forest through the trees, the larger, more damaging and endemic crimes took place between the banks and the ratings agencies. Of course any actor involved in in the scam and intending to profit from it would not disclose that fraud prior to foisting these securities onto the market. That GS played both sides of the trade is simple hedging, and there’s nothing wrong with that. That they intentionally misrepresented the quality of the securities at the moment of their creation, and then acted, in a concerted effort involving distributing them to the market at anything but honest valuation only points to a larger criminal enterprise.

  11. cognos says:

    Barry –

    Just read the whole SEC action. Continue to disagree with you on this.

    “Who” is buying or selling, is NOT a “material” investment fact. Everyday I work hard to mislead everyone about whether I am buying or selling. It is how I work hard for my capital and my investors. I generally EXPECT broker-dealers to do the same. They CANNOT disclose confidential buy/sell intentions of some clients. If you dont understand this… dont manage money. What does everyone else in this business want to do? (Take your money).

    Paulson was involved in the transaction and wanted a suitable portfolio to take interest in.
    ACA was involved and wanted a suitable portfolio.
    Investor banks were involved and wanted a suitable portfolio.

    ALL had the same information on securities, diligence, modeling, etc. The other parties WANTED the long side of this transaction. And the KNEW it was a synthetic CDO (so they knew, or should’ve known, someone was short).

    And even IF there is some particular commuunication that Torrue was too misleading about Paulson’s role (long vs short). That seems like a super-petty… “Hey, this 1/1,000 deal is not kosher. Some VP said some misleading things, so you’re gonna have to pay a medium fine”. That is not a systematic problem at all.

    Reading the complaint, its clear that whoever made this up wanted to try to place “responsibility’ for some part of the crisis on this type of transaction. Instead of where it belongs — regulators, mortgage lenders, the “buy houses” mindset.

  12. monmick says:

    Wow! Not very nuanced, are we?

    Looking forward to seeing you on CNBC later today…

  13. April 20th, 2010

    I’m convinced that this situation with the SEC and Goldman Sachs is a limited hangout. Why?…

    “No Criminal Charges Likely in AIG Collapse”
    –April 6th, 2010

    “Don’t crack the seal on the AIG mess. Oh no. The smell alone would be too much to handle…”

    …Unless the AIG imbroglio is untangled, the rest of this is nonsense.

    Goldman Sachs is now a household name. Disemboweling some flunky will give the crowd something to cheer about.

    But who paid out on the Goldman sludge, and a whole lot of other sludge?

    That’s right, make sure the curtain stays closed on that AIG sausage factory.

    These aren’t the droids you’re looking for. *subtle hand gesture*

    Via: Politico:

    Former New York Gov. Eliot Spitzer said on Monday there are “no coincidences” in the Securities and Exchange Commission filing a lawsuit against Goldman Sachs just as Democrats are about to bring up financial regulatory reform in the Senate…

    GS/ACA is one thing, though, there’s, literally, a Mountaing of this G*rbage that needs to be “un-Landfilled”..

    if AIG, and, at least, the NYFRB, are not going to be ‘sorted-out’, this, SEC v. GS, ‘action’ will recover little of value..

  14. HEHEHE says:

    First let me begin by asking how hard is it for the people in the MSM financial media to learn how to pronounce the word abacus? Do they even know what an abacus is? That Cramer and Erin Burnett, too GS alum, were both calling it a-back-us. I even had one when I was a kid. Maybe because of its middle eastern orgins and

    Second, don’t believe the bulls when they try to minimize the impact of these charges. Irregardless of criminal charges being filed this is going to be in the papers for years because of the forthcoming class action lawsuits. They didn’t disclose that Wells Notice in June. GS stock has gone up 30% or more since June. That at a minimum should get the complaints flying even absent any details.

    Third, Fabulous Fab will not be made a fall guy in this either. This isn’t a rogue trader situation. Pitch Books and offering documents go through complaince departments. That in and of itself indicates tacit institutional approval. On top of that GS has promoted th guy from VP to ED. That show’s he was a company guy.

    Cognos, in your job you aren’t “offering” “securities” as defined under the ’33 act. That’s the point you are missing. Everyday broker-dealer interaction is irrelevant. It’s apples and oranges. What’s put into or ommitted from a securities offering document is what is at issue in this case.

  15. HEHEHE says:

    Ps. The litigators at the law firm at which I work, and likely every other law firm in Manhattan, are all walking around with glee right now with $ signs dancing in their heads as they hope for a piece of the action.

  16. Transor Z says:

    The fallacy of false alternatives reasoning being put forth by the spin doctors is that the SEC must either (1) produce the Rosetta stone of CDO fraud at 85 Broad Street that unifies and explains everything that went wrong in the financial crisis, or (2) not waste everyone’s time with a “petty” offense involving a potential fine that rounds to zero.

    Actually, all the SEC has to do is make a securities fraud case against Goldman — no more and no less.

    Reading the complaint, its clear that whoever made this up wanted to try to place “responsibility’ for some part of the crisis on this type of transaction. Instead of where it belongs — regulators, mortgage lenders, the “buy houses” mindset.

    Wow, that is truly incredible insight into the mindset of the drafters of this short and plain statement of the claim. It’s a legal document that lays out sufficient facts to establish the required elements of securities fraud under 10b-5 based on one transaction. That’s all it is.

    And since that’s all it is, I fail to see why the machinery is cranking out such high-quality spin. No one expects any more startling “revelations” — do they? ;-)

  17. ToNYC says:

    If you wish to see this all of a piece, consider that the Federal Reserve Act, passed with little notice on December 23, 1913 , was the single act of usurpation of the power of Congress to regulate and coin money. This allowed member banks to collect rents on nine times the actual “money” = stored work output that exists. The cycles of syndication dealing that has now completely spiraled out of control is not cured by the invention of two trillions of never earned “money”. Simply put, the stealing from the body politic has
    reached beyond its natural limit and the beast must be put down.
    Woodrow Wilson, another Princeton academic, dropped the ball big time. The collapse is proceeding perfectly as inherent in the design. Absolute power corrupts absolutely.

  18. KidDynamite says:

    barry – let me fix your last paragraph for you:

    “Its time to demand these completely incompetent asset managers at ACA resign their commission. They are unqualified and incompetent, and have no business being part of any field where understanding asset values or having judgment is involved.”

    (although i think they’re already out of business)

    then you can add one for GS too:

    “Its time to demand these two Goldman Sachs suck ups resign their commission. They are a little too focused on making money at any cost, and not quite focused enough at adhering to the laws in place, and have no business being part of any field where understanding law or having judgment is involved.”

  19. Marcus Aurelius says:

    cognos Says:

    “ALL had the same information on securities, diligence, modeling, etc. The other parties WANTED the long side of this transaction. And the KNEW it was a synthetic CDO (so they knew, or should’ve known, someone was short).”

    “Knew, or should have known.”

    That’s a very important phrase.

    Again, it doesn’t really matter if names and supposed intentions were disclosed, one way or the other. What is important is that these “securities” were only “wanted” because of their fraudulent valuation and reasonable expectations regarding their performance, going forward, based on that valuation. The onus is on those who created, valued, and distributed this dreck. That you would switch that onus onto the buyers of the securities tortures the facts and places the blame from the perpetrator to the victim.

    Similar scenario:

    Mr. Jones: Officer, my bicycle was stolen by my neighbor.

    Officer: How do you know your neighbor stole your bike?

    Mr. Jones: It was on my porch last night, and this morning, it was in his garage.

    Officer: Was the bike locked and chained to your porch?

    Mr. Jones: No.

    Officer: Well then, it’s your fault. The bike wasn’t stolen, it was found. It’s a crime to leave valuable property unlocked. It unreasonably tempts the greedy, and who can blame them for taking something that isn’t secured? You should have known better.

  20. dss says:

    The politicization of America is complete with the SEC voting along party lines instead of following existing law.

    Where are the charges against the ratings agencies?

  21. rktbrkr says:

    The 2 R votes against this GS action is just a continuation of the deaf, dumb and blind regulation of the Bush admin which brought us to the brink of financial armageddon. Has there ever been a more head-in-the-sand crew? Greensputum included.

  22. HEHEHE says:

    A step further Marcus, it doesn’t even matter if the securities were made to be shorted etc, all that matters is that those facts were material and not disclosed in the offering documents. That’s it. That is the case. People’s motivations, who said what to whom beforehand etc won’t mean squat if this goes to court, all that will matter is what an investor reading the offering document would think with the information included as opposed to without it included.

  23. HEHEHE says:

    And one more thing, if Goldman thinks they are going to have a problem with the SEC leaking unflattering emails etc, wait until the class action bar gets involved:) Those guys and gals are a breed unto themselves.

  24. rktbrkr says:

    Just wondering if there were any comments by the 5 commissioners concerning their votes.

    The indexes should have plunged after reading that 40% of the SEC commission wouldn’t vote to pursue the GS investigation.

  25. zell says:

    Cognos: You have a tin ear on this. Anyway, if there is no merit to the case it will be tossed summarily, and I haven’t heard that from G.S.. They’re bracing for a battle.

  26. rktbrkr says:

    Andrew Cuomo is a commission of one with the extraordinary powers of the Martin act on his side.

  27. ToNYC,

    to your point..

    “Central Banks Impair Financial Stability

    The recent financial crisis shows how the Federal Reserve and other central banks can fuel the financial booms that make severe busts possible. Unfortunately, theoretical discussions of central banking badly neglect its role in fostering financial instability–in part because they ignore its history and political origins, according to economist George Selgin, author of “Central Banking as a Source of Financial Instability,” the lead article in the Spring 2010 issue of The Independent Review.

    The earliest central banks, Selgin explains, were established to meet the fiscal needs of their sponsoring governments, especially by extending them short-term credit. Given their origins, it should not be surprising to learn that central banks face pressure from their governments to expand credit excessively. That pressure creates huge risks: because central banks possess a legal monopoly in the provision of money, they face no inherent limit to the amount of credit they can create.

    The situation was starkly different prior to central banking, when private banks were free to issue notes that circulated as money, Selgin argues. Banks that issued too many notes would lose reserves, as customers and other banks redeemed them. That prospect gave note-issuing banks strong incentives not to over-issue. Unfortunately, most economists don’t understand this market mechanism, which Selgin calls “the principle of adverse clearings.” Thus they overlook the benefits of free banking and accept central banks and their damaging monopolies in the provision of money.”

    “Central Banking as a Source of Financial Instability,” by George Selgin (The Independent Review, Spring 2010)

  28. dsawy says:

    Wait a second.

    I think, as an investor and trader, that the single most important material fact that was denied to buyers of the synthetic CDO’s was this: they were designed to fail. ie, they were designed, at the outset, by the person taking the short side. I don’t care who he is, or how big his trade is.

    Goldman knew:

    1. Paulson wanted an instrument to short. He said so when he asked Goldman to create the synthetic for him.
    2. How Paulson was going to short the instrument – because Goldman sold the CDS.

    Show me another instrument on Wall Street where it is *designed* to go down in value and this fact is not included in the offering materials.

  29. These are the facts as alleged by the SEC complaint:

    Fab Tourre informed potential buyers of a CDO that a well known fund was investing $200million in that CDO, Abacus2007.

    This was untrue. Not only wasn’t he investing money in it, he was actually betting against it. And, he helped construct the fund so it imploded.

    GS knew this thru Tourre, and chose to make material misrepresentations about these facts when selling these securities.

    Next case.

  30. HEHEHE says:

    Another thing that gives me a chuckle, when TSHTF back in 2007-2008, John Paulson and Lloyd Blankfein were bragging in the papers about how smart they were to short these suprime mortgages yada-yada-yada. Let that be a lesson to those out there, if you make few quick billion on a trade, maybe brag to a few friends, don’t invite Bloomberg or WSJ to write an expose about you and how smart you are and to call attention to yourself.

  31. Rich in NJ says:

    I think they hired Gregg Craig because they want to settle the case.

  32. Greg0658 says:

    HEHEHE @ 8:12 am – “The litigators at the law firm at which I work, and likely every other law firm in Manhattan, are all walking around with glee right now with $ signs dancing in their heads as they hope for a piece of the action.”

    LOL hahahaha – funny thing about paperpushing – its all work for buck – and these days good money – and folks who push other things that make things are laughing all the way to end days carry’g yours load

    (after playing out all possible outcomes for Global Thermonuclear War]
    Joshua: Greetings, Professor Falken.
    Stephen Falken: Hello, Joshua.
    Joshua: A strange game. The only winning move is not to play. How about a nice game of chess?

  33. rktbrkr says:

    Cuomo sees no conflict of interest…?

    A billionaire hedge fund manager and his firm who have become central figures in the investigation of banking giant Goldman Sachs gave Attorney General Andrew Cuomo nearly $100,000 in political contributions — but Cuomo says he won’t return the money for now.

    State campaign records show John A. Paulson — head of the Paulson & Co. hedge fund mentioned in the Securities and Exchange Commission civil complaint against Goldman Sachs — joined others in his firm to give money to Cuomo since 2008. Records show the total includes $26,000 directly from Paulson and $55,000 from Paolo Pellegrini, a former hedge fund manager at the Manhattan-based firm.

    Paulson’s firm was mentioned prominently last week in the SEC civil complaint. It alleged that Goldman deceived clients into buying mortgage securities secretly put together by Paulson’s hedge fund, which profited from their decline in value. Goldman denies the charges, and Paulson’s firm has not been charged with any wrongdoing.

  34. Richard R says:

    Goldman’s defense that these instruments were sold to sophisticated investors capable of assessing the risks omits the reality of the buyers’ incentives. These are not buyers who are betting their own cash, but are managers trying to keep jobs and bonuses by staying with the herd. To do so they end up giving away Jo;e Citizen’s pension and FU’s endowment. The managers are fine if they lose 50% as long as other institutions do – but if they earn 4 points rather than 7 out of caution and good due diligence they are out. Maybe it’s time to include some asset managers in conspiracy indictments. At least let’s not forget that the smart guys at the banks knew that the institutional mooches HAD to buy this junk.

  35. rktbrkr says:

    Cuomo’s in an interesting position, if he goes after Blanfein and the other Wall Street villains then he picks up popular support among the unwashed masses but loses financial support from Wall street. NYC is as much a 1 industry town as Detroit was in the 60s. (Now Detroit is a zero industry town).

    Wall street, thanks to Gentle Ben’s generosity is about the only cylinder firing and I don’t know if Cuomo wants to be seen as pulling the spark wire

  36. jpm says:

    Excellent typo: “vilation” is much better than “violation”. It somehow invokes the vileness of the act.

  37. Mannwich says:

    @HEHEHE: I had a thought about that the other day. It’s almost like the brilliant criminal who simply can’t resist telling everyone about his brilliance (in fact, he probably relishes the recognition more than the coin itself), but that ultimately becomes his downfall.

  38. dsawy says:

    Well, now we see the Democratic response to the issue:

    Send Greg Craig to work for The Squid.

    On the GOP side, we have oblivious cluelessness and vigorous osculation of Squid posterior.

    And on the DNC side, we have the revolving door spinning like a turbine.

  39. Transor Z says:

    What a lot of people don’t understand is that securities fraud as an offense is not so much like your commonplace used-car civil fraud than it is like the FTC going after a company for false advertising, EEOC going after a company for unlawful job descrimination (“Handicapped Irish Catholics need not apply”) or HUD going after someone for discriminatory real estate ads (“White non-Jewish people without children only, please”).

    When Dylan Ratigan went on his rant the other day about rigging a car to blow up, IMO he actually did a bit of a disservice to the public by dumbing things down too much. This opens the door to Goldman defending itself by saying ACA and IKB were sophisticated parties who knew the risks. True enough — but completely beside the point.

    This is why it is possible for there to be nominal actual damages of $1 in a securities fraud case accompanied by a much larger civil penalty: because the liability attaches more to prohibited conduct than on victimization. We just plain don’t want issuers of securities making material misrepresentations or under-disclosing important facts underlying a transaction — and we don’t really care whether the parties involved were “sophisticated” or not.

  40. larry says:

    I’m kind of sick of the attitude of “it’s the game, not the players”. Time to go after the players who do their best to keep the game going. Perhaps we need some kind of financial industry specific RICO?

  41. tsize says:

    Guys guys, the SEC will lose this case. Cognos is right. Also haven’t we learned anything from the SEC’s failed investigations into Madoff? They are not an effective watchdog to say the least. Has anyone listened to Harry Markopolis?

    Bottomline: GS didn’t have to disclose seller.

    Real Story: SEC can only bring love-tap CIVIL suits. If there was serious smoke here it would be a DOJ action, in which case the IRS and FBI joins the party. SEC has no teeth folks. I’d love to hear Harry Markopolis take on this.

  42. StatArb says:

    Regardless of how this falls … I will wait until the case is tried in court and is judged

    I always believed in ” Innocent until proven guilty ” ….. but I guess the string of comments indicates that I am wrong

  43. scharfy says:

    Lloyd Blankfein vehemently defending this suit illustrates Goldman’s transformation from a traditional Investment Banking firm, into a trading firm.

    2009 Revenues were 75% trading 25% I-banking and everything else.

    (given 2009 was big for trading and peanuts for everything else – but nonetheless indicative of the trend)

    This demonstrates that the firm has gotten “short-term greedy” – like a trader, not “long term greedy” like an I-banker.

  44. tsize says:

    StatArb, there is no criminal liability here. GS cannot possibly be “guilty.” Its just a civil suit in which they may be liable and open their checkbook. Its just the SEC; not the DOJ.

  45. cdosquared5 says:

    Barry, you write “allege” and then “case closed”. Beyond the inconsistency of writing allege and then concluding case closed, What is the evidence the SEC provides? Two clipped emails? One to someone on the sales desk not involved in the structuring of the transaction? There is a tremendous rush to judgment occurring without much airing of the facts.

  46. I read the entire complaint.

    Its fairly obvious that there were substantial interviews done with Goldman personnel, John Paulson, Pellegrini, etc.

  47. cdosquared5 says:

    If you read Goldman’s responses to the SEC in September, you will see that there is no precedent for the counterparty in the CDS on the reference portolio being disclosed. As a technical matter, it is disclosed that Goldman is the counterparty in Abacus 2007-1 but they say they may enter into offsetting transactions, which they did with Paulson and ABN/ACA.

    The only claim that seems reasonable is Tourre misleading ACA as to Paulson’s investment. But, again, the evidence presented by the SEC to date is incredibly thin, based on two clipped email messages as the “evidence” that Goldman misled them.

    I found one example of an egregious error in the SEC’s brief which illustrates the length they are going to bring this case to bear, which I think will be shown as simply politically motivated eventually. They reference the “cdo biz is dead” quote from an unnamed Goldman employee to Tourre as example of Goldman institutionally thinking “the subprime house is burning down” (my paraphrase). Yet in Goldman’s first reply to the SEC in september (footnote 9 on page 37) the context of that email was the imminent launching of a MarkIt index on the BBB and BBB- tranches of the ABX, and thus there would be no more need to underwrite CDOs as investors would be able to easily gain long / short exposure through swaps on that index, those no new CDOs would need to be underwritten like Abacus, thus, “the cdo biz is dead”.

    Again, the facts simply need to be aired before hyperbolic statements of guilt and rush to judgment. GS maybe guilty of plenty other sins, but this seems to be incredibly thin gruel.

  48. Transor Z says:

    The only claim that seems reasonable is Tourre misleading ACA as to Paulson’s investment.

    I think that’s got to be the heart of the matter, too. GS’s point about not disclosing counterparties is a smokescreen.

    It’s just like when you’re selling your house and showing the place to a prospective buyer. There are some defects that the law says you MUST disclose to buyers, up front, without prompting. And then there are those hidden problems/annoying issues you know about and know that they would impact the buyer’s valuation of the house, maybe even their decision to buy. What does your lawyer tell you to do about that latter category of defects? Keep your mouth shut, of course!

    Why? Because as soon as you open your mouth and think you’re going to be slick by raising the issue of the septic tank in order to downplay any problems — boom, you’re toast. You’ve opened the door to liability for misrepresentation/unlawful nondisclosure. Now you better fully disclose all known defects about the septic system. Because even though caveat emptor applies to buying a house, and even though a thorough inspection might have detected the problem, your ass is still swinging in the breeze because you opened your mouth thinking you were slick wanting to close the deal. On thing that seems clear is that Fabulous Fab is the kind of guy who thought he was VERY slick.

  49. bobopapal says:


    You’ve totally jumped the gun on this and I’ll tell you why.

    First you emphasize how you use facts and data to reach your conclusion. The problem here is that you are not in possession of all relevant facts and data that pertain to this case. We both know that there will be more information presented. Currently we have the SEC version of events.

    Next you launch an attack on the Republicans on the SEC without a lick of knowledge as to why they voted against bringing the charges. I don’t see the political advantage for them to vote no, as Goldman is universally despised. I could just as easily say that it’s obvious that the Democrats voted yes for partisan reasons because it was perfectly choreographed between the SEC, Senate and White House to aid the final push for Democrat sponsored regulatory overhaul. I may suspect that, but I really can’t, and won’t, claim it to be gospel truth.

    Goldie is the Vampire Squid but you’re to quick to judge without all the facts known.

  50. ToNYC says:

    Mark E Hoffer:

    Here’s a historical view to see the Grand Design, and why it’s all perfectly exploding in exponentially absolute corruption.
    With all the fake invented “money” being used to charge rent or “interest” as if it were the TBTF Member Banks own stash, while our stored real savings is worthless and not a factor, receiving ZIRP or bupkus…..


  51. philipat says:

    GS appears now to be trying to blame it all (Sorry, I meant distance itself) on Tourre (Great recruitment tool; You’ll be on your own if WE get caught?) doesn’t that Executive in his Executive Director title convey that he was acting for and on behalf of the firm? It would in most industries but the reason I ask is that I know in Banks titles don’t mean very much (The Office janitor is a Vice President?)

  52. mbelardes says:

    Can we get some practicing securities litigation plaintiff attorneys to comment?

    52 comments and I count 2 statutes mentioned and 1 case?

    All I see above is a bunch of Goldman hating, definition reciting, and political speculation.

    You guys really want to take down the bad guys? Read up on civil and criminal RICO and start nailing Hedge Funds, I-Banks, and Credit Rating Agencies to the wall.

    But it really isn’t helping the cause here if you just go “It’s fraud because it is.”

    It’s fraud when, “The jury finds the defendant, guilty, on the count of securities fraud” and that’s it.

    Learn something from the repeat chokefest of the SEC that has been the BofA/Merrill failed disclosure (Remember, “hey, don’t tell the shareholders about our bonuses and billions of losses until after they vote to merge, m’kay?) and the blatant Bear Stearns hedge fund fraud (Remember, “oh yeah, of course I’m investing my own money in this failing fund”).

    Those cases were far more egregious and clear cut and the SEC settled with BofA/Merrill and the Bear Stearns guys were acquitted by a jury that even said they would have invested in the fund (Yeah, the SEC is THAT shitty).

    I just haven’t heard very many legal explanations as to how this gets beyond settlement, how this is a guaranteed win in court, or how this even really rains on Goldman’s parade by tacking on upper management.

    I read the complaint. The Fabulous F-up is the fall guy here. Back to the drawing board. (UNLESS the SEC, DOJ, NY AG is using this civil case for discovery purposes to dig up more information/facts to pursue additional cases).

  53. [...] active attempt by buyers to deceive sellers as an insurance deal. Barry Ritholz says Goldman broke Rule 10b-5. The NYT saw it all coming in December, and Pesto says RBS was on the losing side of the [...]

  54. Transor Z says:

    52 comments and I count 2 statutes mentioned and 1 case?

    Here’s a cite: My Foot v. Your Ass, 111 F.3d 222 (2010).

    Go to a legal blog if you want technical peer-to-peer legal analysis. Clown.

  55. Goldman’s Tourre De-Registered in U.K.

    [Why, if he did nothing wrong?]
    Goldman Sachs Group Inc. has de-registered Fabrice Tourre, the employee charged with fraud by the
    Securities and Exchange Commission, with the U.K.’s main financial regulator.

  56. mbelardes says:

    Clown? Don’t be so obtuse. The finance guys not understanding law and the legal guys not understanding finance is half the reason our country can’t get any sort of decent regulatory reform and 90% of why the SEC is ineffective (please read the Madoff saga).

    My point was: everyone here is just yelling loudly.

    Barry went to law school (if ya didn’t know) and this entire post is a legal post (he mentions Rule 10b-5 right in the headline and BR’s first comemnt was a case citation). Thus I commented in regards to legal issues in the case.

    So if you want to bark at Goldman that they committed fraud, have at it. If you want to convict them of fraud or get a judgment against them, then get a solid handle on statutory and case law.

    Is there a case against Goldman and other I-banks? Yes. Will it be made? Probably not. Institutional Investors are passive aggressive when it comes to litigation and the SEC is incompetent and has no balls and is run by politicians.

    I’m no pro, but I’m in brokerage and I’m in law school and I can see plain as daylight the angle the defense is going to win on. I just wish you finance guys would bone up on your law skills and help out the plaintiffs attorneys and deliver some justice. I listened to a Paulson call and the Goldman call yestereday and the first thing that came to my mind is, “a jury will buy their story faster than ACA buys toxic securities.”

    That makes me a clown? Then I guess the jokes on all of us that want reform and justice.

  57. mbelardes says:

    Again, I want to stress I’m no pro. I’m just a B- law student that actually does want to see someone go after Goldman, Lehman, AIG, etc and driven crazy by the number of cases clearly being sat on for whatever reason.

    My position is that these banks team up with defense attorneys and uses the complexities of finance to avoid regulation and definitely to confuse jurors, assuming it gets that far.

    The “good guys” of finance gotta team up with plaintiffs attorneys and regulators to fight back. We don’t have the luxury of billion dollar war chests just for lobbying and litigation expenses.

  58. Transor Z says:

    Ah, a law student. That explains a lot.

    I found your comment insulting because I am a litigator and occasionally offer my anonymous “insights,” such as they are, for a lay financial blog audience. If you want to engage with other commenters, some of whom are also practicing attorneys, regarding the substance of the analysis provided in comments, you really shouldn’t make idiotic blanket statements of the kind you made above.

    Actually, Barry graduated from law school only three hours after graduating from college. He’s THAT smart. ;-)


  59. mbelardes says:

    Condescending comments. I love those. Law school is my evening hobby, not my career path. I’m a glutton for punishment and just wanted to add the JD to the wall while I can. Always had an interest in a legal education but I have zero interest in practicing. So you can part with the idea that I’m some 22-year old naive kid that couldn’t find a job after college and went to law school on daddy’s dime.

    I spoke to Bill Lerach about all this last week at a seminar at USD. I’m sure you know who he is. I’ll just say that my statements were more specific and more optimistic about the use of litigation than his opinions. Perhaps he’s jaded from jail. Perhaps he’s on point. I also had a very in depth conversation regarding this case with my white collar crime professor (adjust professor that is a white collar defense attorney by day and formerly at the US Attorney’s office). He said he didn’t think this was part of a larger investigation and figured the SEC is tryin to establish a glimmer of credibility and thought possibly the USAs and NY AG might use this to pursue other cases, but expressed severe doubt.

    Here we are 18 months after the blowup and the best we have on GS is Fabulous Fab? I may be a mere part-time, B-, law student , but I know enough to see who is smarter than who in this battle. And it’s been a one-sided ass kicking for as long as I can remember. Sorry if pointing that out is insulting to you.

    In fact, the one thing I’ve learned most in law school is how much these guys are shielded by current laws (and politics). But THAT is a posting for another blog…