SEC started investigating Abacus in 2008

By Felix Salmon
April 19, 2010

Talk about Goldman not disclosing material information. I’m not talking about Abacus here, I’m talking about the fact that Goldman knew as far back as last September that the SEC was on the warpath with respect to Abacus, and gave no hint to shareholders that there might be legal trouble afoot.

The WSJ has got its hands on — but, unforgivably, has not posted online — a letter that Goldman Sachs sent to the SEC in September, claiming that the Paulson’s involvement in Abacus was not material. (This, incidentally, should help keep quiet anybody who credits the press in general or the NYT in particular with being central to this story: the SEC was clearly on the case long before the press was.) In fact, the SEC probe dates back all the way to August 2008:

Goldman said it first heard from the SEC about the investigation in August 2008, when it received a subpoena requesting documents related to the transaction…

In July 2009, Goldman and Mr. Tourre received so-called Wells notices from the SEC. Such notices are a formal warning that regulators intend to file civil charges.

The letter clearly wasn’t very convincing, and Goldman surely knew it.

Goldman argued that the facts about Paulson weren’t material. In the response, reviewed by The Wall Street Journal, Goldman asserted that hedge-fund manager John Paulson, today a famed figure on Wall Street, was nearly unknown when the securities were sold in early 2007, and participants were unlikely to have cared about his role.

This is just silly. Paulson’s involvement was material not because who he is, but because a person with enormous control over the contents of the CDO was exerting that control with the express intention of making them as toxic and failure-prone as possible. Goldman isn’t stupid, so they surely understood what the SEC was driving at, and also understood that their response was weak.

It’s the job of Goldman’s lawyers, of course, to fight these SEC charges aggressively. But when they got the Wells notice in July, they surely realized that there was a significant chance charges would arrive at some point. And so they had a duty to reveal that fact to shareholders.

Add this to the lawsuits likely facing Goldman, then: suits from shareholders who suffered a massive loss on their holdings Friday, and who will claim, reasonably enough, that Goldman should have told them about the Wells notice and its discussions with the SEC.

On the other hand, Goldman might have assumed that all SEC lawyers were utterly toothless, at least if the one dug up by the WSJ is any indication:

“This isn’t mom and pop getting taken advantage of,” said Peter Henning, a professor at Wayne State University Law School and a former SEC enforcement lawyer. These clients “might not have known about Paulson, but they had to have known that these securities were extremely risky.”

Yeah, this is the kind of person that the SEC hired as an enforcement lawyer: someone who seems to think that a small state bank in Germany “had to have known” that the CDO was extremely risky, even when it carried a triple-A credit rating. In fact, given the modest yield pick-up that the tranches offered, I think it’s pretty obvious that the investors can’t have known that the securities were extremely risky. If they had, then they wouldn’t have bought them.

In any case, the more we learn about this case, the worse it looks for Goldman. Even if they go to trial and win, they surely face multiple lawsuits. If they settle, they’ll get more. And if they go to trial and lose, then that could be extremely harmful indeed to their franchise.

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Comments
6 comments so far

“Yeah, this is the kind of person that the SEC hired as an enforcement lawyer: someone who seems to think that a small state bank in Germany “had to have known” that the CDO was extremely risky, even when it carried a triple-A credit rating”

Why are you so anxious to clear a multi-billion dollar “small state bank” of culpability in an investment that makes a Nigerian bank email scam look solid? The German government has not agreed and is trying the ex-ceo for failure of fiduciary duty, by the way. The flipchart says quite plainly that GS was taking the protection side and would walk off with the deposits if anything went wrong. Why should a multi-billion dollar bank have the right to assume that GS or whoever GS sold that side to was just giving up premiums for fun? I’m pretty sure that IKB thought they were taking advantage of a naive investor on the other side.

Posted by rootless | Report as abusive

The Obama administration is running with these charges now to do exactly what Barney Frank says, “make financial reform bill pass more easily.” What a group of political hacks and the rabid Obama supporters, including the NYTimes, obeyingly support. What has happened to this country….we’re ruled by Chicago politics, not rule of law. Everything this administration does is for political gain or political CYA….Obama doesn’t want the other side saying he is beholden to Goldman because of a $billion in campaign funds….but he is beholden and you’ll see very little happening to Goldman. Interesting these charges began during the Bush administration….at a time when Obama was still getting millions from Goldman….if they didn’t expect something in return from the Obama team, they really are a defective investment firm.

Posted by lezah2 | Report as abusive

Lezah,

Think this through. You’re claiming that Obama is bought and paid for by Goldman AND that he’s using this to push through financial reform bills that Goldman staunchly opposes.

You’re certain this is motivated by politics, but you don’t have any evidence other than it came out at a time that would be advantageous for the President. You admit that the probe was started under the Bush Administration. Its also taken about the amount of time one would normally expect for a complex white collar claim. Shouldn’t we wait until there’s some beef before we start throwing around big claims like we aren’t under the Rule of Law anymore?

And what exactly do you mean by that, anyway? Changing the timing of an indictment may be dishonorable because its using the government for political gain, but it only changes the timing – its not a breach of the rule of law. County prosecutors all around the nation set up their big cases right before election time if at all possible, and have done this for centuries. Were we never under the rule of law?

The only breach of the rule of law you mention is your prediction that they’ll get a slap on the wrist . . . which hasn’t happened yet.

Your facts aren’t quite right either. Obama didn’t get “millions” from Goldman – he didn’t even get a million, although he came very close. Out of a total haul of about $750M. Even if he is being entirely cynical, cracking down hard on Wall Street banks will do him more good than a million in ads will, especially with how flush with cash he’s likely to be.

I’m also not sure I understand why its significant to you that the charges were first considered by the Bush administration, unless you mean simply that Bush was less tained because he was a lame duck.

Goldman was Bush’s number 5 donor, gave Bush almost the same percentage of his overall haul as it gave Obama (.0011 to .0013) and overall, Bush was much more in debt to the financial industry.

Bush’s top 12 donors were 9 Wall Street banks and 3 accounting firms. Obama’s top 12 donors include 4 Wall Street banks, 3 Universities, 2 movie companies, 2 tech companies and the law firm his wife worked at.

For comparison, Goldman was McCain’s #4. The top 5 were all Wall Street, and the remainder of the 12 were 3 more Wall Street firms, an accounting firm, AT&T, government employees and Army employees.

Posted by AnonymousChef | Report as abusive

Besides AnonymousChef being right in everything he says, and informative (so thanks) it’s overkill. Lezah’s comment comes close to being the sort of anonymous robotype full of stereotyped bullet point phrases that betrays the demented teabagger trying to ruin other people’s intelligent sites by demanding not to have the government interfere with her Medicare and calling Obama “Obummer” and other such refrigerator-mold-covered “wit”. You don’t need that kind of low level stuff here.

I see you follow Clusterstock, which had to cut down the kudzu blogposters. I’d be sorry to see the teabaggers start posting here.

Posted by darms | Report as abusive

Where were these people like lezah, who are so concerned about the intrusion of corporate corruption into political life, during the years 2001-2008?

Posted by SelenesMom | Report as abusive

“Where were these people like lezah, who are so concerned about the intrusion of corporate corruption into political life, during the years 2001-2008?”

To be fair, there were a lot of white sheets and hoods to be washed and folded.

Posted by rootless | Report as abusive
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