To be precise, the SEC lawsuit against GS is for "fraudulent misrepresention" in the marketing of the nature and potential liabilities or problems with Abacus 2007 AC-1 $1B CDO. Paulson was not and could not be charged because he was not marketing and "misrepresenting" AC-1 CDO.
As a matter of fact, John Paulson - who was one of the pioneer of using Credit Default Swaps "insurance" instruments for synthetic shorting of other financial instruments (like CDOs, MBSs, SIVs) and financial firms that bought them - was buying cheap puts in the form of CDSs on these CDOs and paid GS $15M for structuring and marketing Abacus 2007 AC-1 CDO.
From SEC: "Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio while telling other investors that the securities were selected by an independent, objective third party."
The SEC lawsuit itself, though, is very iffy. This particular Goldman's CDO was a private placement, not registered offering, so the buyers were all pretty sophisticated institutional investors and funds, not naïve retail investors.
"This case didn't come as a surprise to Goldman. Presumably, Goldman believes that its defense is strong or they would have settled with the SEC," wrote Brad Hintz, brokerage analyst at Sanford C. Bernstein, in a client note Friday.
The real reason Goldman Sachs was hit with this SEC nuisance / publicity lawsuit is that Obama and Dems in the Senate are hoping to use the Republicans' and conservatives' intense dislike of Goldman Sachs and get them on board to push through [tougher] Finance Reform bill.
Of course, just like ObamaCare doesn't even attempt to deal with and contain rising medical costs, Obama's Finance Reform has nothing to do and doesn't deal with the sources of real estate bust and consequent financial crisis - insane Community Reinvestment Act (CRA) laws and de facto mortgage market regulators, government-owned Fannie, Freddie and FHA, which between them now own or control 9 out of 10 mortgages in U.S.
SEC lawsuit is just a red herring to make Financial reform possible or "tougher" than it othwerwise may be.
Thanks CP.
Goldman received Wells Notice 9 months ago, so they had plenty of time to quietly settle the matter, if there was anything to it. Most of these result in consent decree aka negotiated settlement arrangements.
The lawsuit itself is so narrow and requres a "proof of negative" from the government (it's about what GS "misrepresented" to buyers by not telling them about who was on the other side of the trade, which is consistent with the usual practice of private placements by any investment company anyway) that it essentially specifically excludes a counterparty (John A. Palson & Co.) from any liability and is [almost] designed to fail in court. Usually the government likes to make charges as broad as possible, in this case they created an almost destined to fail, narrow "proof of negative" contract law case.
Abacus Let Goldman Shuffle Mortgage Risk Like Beads - BL, 2010 April 17, by Jody Shenn and Bob Ivry
The bank used the deals to off-load the risk of mostly subprime home loans and commercial mortgages to investors, either as hedges for similar positions or to bet against securities itself. While the data show New York-based Goldman Sachs issued at least $7.8 billion of Abacus notes, the risk passed to investors was multiples higher. The Abacus transactions are so-called synthetic collateralized debt obligations, which marry two financial innovations that contributed to the worst collapse in financial markets since the Great Depression. “Investors needed to ask some questions about synthetics they didn’t need to ask with other CDOs,” Joseph Mason, a finance professor at Louisiana State University in Baton Rouge, said in a telephone interview. The financial tools, often called technologies, are credit default swaps, used to transfer the risk of losses on debt, and securitization, used to slice the risk in a pool of assets into various new securities. Abacus deals were filled with default swaps that offered payouts to Goldman Sachs if certain mortgage bonds didn’t pay as promised, in return for regular premiums from the bank. ..... From July 2004 through April 2007, as credit markets boomed, Goldman Sachs Group Inc. created 23 financial transactions called Abacus, the word for a relatively crude counting tool involving the shuffling of beads. .....
Goldman Sachs Said to Have Been Warned of SEC Suit - BL, 2010 April 17, by Joshua Gallu and David Scheer
Goldman Sachs responded to the so-called Wells notice from the Securities and Exchange Commission within months and met with the agency officials trying to fend off the civil lawsuit, said the people, who declined to be identified because the talks weren’t public. In March, the New York-based firm said it was cooperating with regulators’ “requests for information.” “The question is whether a general disclaimer like that is rendered misleading because you left out the specifics,” said Adam Pritchard, a former SEC attorney ..... Goldman Sachs’s annual report for 2009, filed with the SEC in March, recycled a passage the company used in the previous year’s report to describe regulatory probes involving securities linked to subprime mortgages. ..... Goldman Sachs Group Inc., which fell 13 percent yesterday after U.S. regulators announced fraud accusations, didn’t disclose that it was warned nine months ago that investigators wanted to bring a case, people with direct knowledge of the talks said.
Democrats Say Goldman Sachs Fraud Suit Bolsters Case for Rules - BL, 2010 April 17, by Alison Vekshin
The Obama administration and congressional Democrats are using the Securities and Exchange Commission lawsuit accusing Goldman Sachs Group Inc. of derivatives-linked fraud to bolster their case for overhauling financial-industry regulations. .....
For Some Investors, Another Reason to Distrust Wall Street - CNBC, 2010 April 16, by Jeff Cox
Yet at least part of the reason investors have grown suspicious is because of the increasingly complex and less transparent products that helped bring about the crash in 2008. While terms like collateralized debt obligations and credit default swaps have become more common in investor vernacular, many still don't understand how they work. They're likely to become even more befuddled and frustrated when such terms are thrown around in cases like Friday's shocking news regarding Goldman. Part of the allegations center around whether Goldman packaged securities that were likely to fail and then didn't tell investors that a hedge fund client had made bets — short sales — against those same securities. ..... Indeed, there was a fair share of doubt in the financial community about whether the SEC would be able to prove its case against Goldman, as well as skepticism about whether the government wasn't conveniently setting up the case for the Obama administration's financial reform package in Congress. As if on cue, the Democratic National Committee released a statement Friday afternoon from President Obama saying "we cannot delay any longer" on the reform bill. "I'm not sure it's just a slam dunk, SEC-wins Goldman-loses (case)," Lutts said. "You have some very smart people running Goldman and I don't think they made any big mistakes on this particular product." ..... The tumult Friday over fraud accusations against Goldman Sachs is likely to add to the deep mistrust among investors that the market is rigged against them. How long that sentiment lasts could depend on whether the accusations against the Wall Street banking titan stick, and if they are symptomatic of a larger contagion within the trading practices of major institutions. .....
The Obama's Democrats equivalent of the Reichstag fire?