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SEC v. Goldman Sachs – Lessons to be learned?

The SEC, in a move that has stunned some of even its harshest critics, has brought an action against Goldman Sachs based on securities fraud in connection with the sale of synthetic collateralized debt obligations.  A copy of the complaint may be found at www.sec.gov/litigation/complaints/2010/comp-pr2010-59.pdf.

While many cynics could not resist commenting on the timing of this lawsuit given the significant financial industry reform bills pending before Congress, while others are riding the populist sentiment against Wall Street when it comes to the murky world of collateralized debt obligations and credit swaps (see Michael Lewis’s excellent book The Big Short if you really want an education), for participants in the securities markets, there are two important lessons to be learned from this action:

  • The heart of the SEC case rests principally on ‘materially misleading statements and omissions’ in the offering materials presented to investors.  Specifically, the SEC notes that undisclosed in the offering materials was the role that Paulson & Co. Inc. played in the selection of the portfolio offered to investors, particularly when the Paulson fund was ‘short’ the very securities constituting the fund that was offered ‘long’ to investors.  Thus it is always important to remember that when preparing offering materials to investors, what an issuer doesn’t say is as important as what it does say when it comes to providing investors with the mix of information needed to make an informed investment decision.
  • In addition, Fabrcie Tourre, a relatively low level Goldman employee, was also named as a defendant in the case.  While there are several reasons for Mr. Tourre to be individually named in the lawsuit, a primary cause was his email record of inconsistent and often flip remarks concerning the very disclosure being provided to investors.  Particularly in the broker dealer world, where emails are required to be electronically maintained by member firms, it is critical to remember that any email can become suspect with either investors or regulators with 20/20 hindsight.  Any person involved in the creation and/or distribution of securities, whether or not registered with a broker/dealer should always think twice about the content of an email before hitting the send button.