Why SEC Has Strong Case Against Goldman, Part 2

Suna Reyent submits: << Return to Part 1The “But They Were Big Boys” DefenseThis is the defense that Goldman, while acting as a broker-dealer, did not act in a fiduciary capacity in this deal, a fact that sophisticated investors are well aware of. Touché. But fraud is still fraud regardless of who the victim is. In other words, the laws that Goldman is charged with violating apply to qualified institutional buyers under Rule 144A as well.The senate grilled Goldman executives on having made money at the expense of clients. This is bound to provoke outrage in the constituency, although betting against clients in and of itself does not a legal case make. But it does assist in establishing the bigger picture that shows purposeful actions on the part of the firm to push the aforementioned CDO deal onto the customers in an inappropriate and misleading fashion.Besides, it does not hurt to spice up the case with insider details on how Goldman made money via selling “cats and dogs” to sophisticated clients. Not to mention that the deceived “big boys” may have been taking care of individual savings and retirement accounts of ordinary folk.The “But The CDO Would Have Performed Poorly Even Without Paulson’s Involvement” DefenseSo, that’s why the firm was so anxious to dump the “cats and dogs” remaining in its inventory, right? And that’s why the firm was trying so hard to find a counterparty to sell its remaining investment in the Abacus CDO as soon as the deal was completed.Whether a certain misrepresentation or fraud changes the final outcome of a deal or situation does not excuse the fact that a material misrepresentation as well as fraud has been committed.This is intellectually equivalent to saying that a person you poisoned died because of an earthquake so what you did to them prior to their death is not punishable by law.The “But Others Were Doing What We Were Doing” DefenseNormally I would contain my sarcasm, but really, how solid is it to try to explain away material misrepresentation and fraud by saying that there were others out there who did what Goldman did as well? Since when did pointing fingers to others become a legitimate defense?But did others do exactly what Goldman did?There were plenty of other CDO deals done on the street. In fact, SEC and Goldman seem to have engaged in at least one conversation regarding which deal on the street included what kind of disclosure throughout the 18 months of this investigation.Deutsche Bank (DB) sold similar CDOs without notifying customers who was on the other side of the trade, and Paulson was taking short bets on these deals as well. Here is how Deutsche Bank’s head of communications argued that its deals were different from Goldman’s Abacus deal:What distinguishes Deutsche Bank's CDO transactions is that both long and short investors were given the opportunity to select the specific collateral to which they were seeking exposure and mutually agreed on the CDO portfolio. No third-party collateral manager was utilized for these deals, which eliminated the potential for deception with respect to the role of such a manager.Complete Story »