By Helen Parry, Thomson Reuters Accelus regulatory intelligence expert. The views expressed are her own.
LONDON, May 16 (Thomson Reuters Accelus) -
“The first private placement memorandum disclosed the possibility that new investors may help pay distributions to old investors but this was not a risk; it was a certainty.” (US Securities and Exchange Commission v Bravata 2011 WL 339458.)
“This disclosure indicates that GSI may invest in securities that are ‘adverse to’ the Hudson investments … Goldman had already determined to keep 100 per cent of the short side of the Hudson CDO.” U.S. Senate Investigations Subcommittee Levin-Coburn Report on the Financial Crisis.
The fact that investors in the Billionaire Boys Club property investment Ponzi scheme, the subject of the Bravata case quoted above, blithely handed over their hard-earned cash, despite the fact that the private placement memorandum disclosed that it may be just that, is a striking example of the dangers that may befall unwary investors who fail to check the small print.
Nevertheless, although disclosing the fact that one might be operating a Ponzi scheme or a conflicted interest may not suffice to protect one from potential liability for misrepresentation or fraud if one has already determined to engage in such a course of action, disclosing such matters when one is yet to make such a determination and the statement is, therefore, true, may do the trick, at least in the case of the collateralized debt obligation (CDO). (more…)