Jody Shenn and Joshua Gallu at Bloomberg have a good piece getting at one of the key legal questions in the case of SEC vs. Goldman Sachs, regarding the meaning of the word “select.”
The marketing materials say the CDO would be linked to securities “selected by ACA,” the CDO manager ACA Management LLC.
Of course that’s true. But the ABACUS CDO was also linked to securities “selected” by John Paulson. At least 30 of them.
Fabrice Tourre sent ACA a list of 123 RMBS (residential mortgage backed securities). He called it the “Paulson Portfolio.”
ACA only chose to use 55 of them in ABACUS. ACA selected the remaining 31 to create ABACUS, so that the CDO had 86 total RMBS inside. The list of RMBS to be included in ABACUS went back and forth between Tourre, Paulson and ACA a few more times and in the end, 90 RMBS were included in ABACUS.
One question is – was Paulson’s chosing the 55 RMBS a “material” fact that should have been disclosed to investors.
Possibly yes. The securities inside ABACUS were not “selected” by CDO manager, ACA. They were about half selected by ACA, half selected by Paulson.
There’s a strong argument that ACA did not select a large portion of them. Paulson alone selected at least 30. He selected at most 55 of the 90 RMBS that landed in ABACUS.*
Working for Goldman however is that it looks like technically, they did nothing illegal.
In a marketing document for ABACUS, Goldman Sachs said it might have access to “non-publicly available information” about the collateral and, because of that, “this presentation may not contain all information that would be material to the evaluation of the merits and risks of purchasing the notes.”
They said up front, “we might not be including material information.” That pretty much covers their bases on the “was Paulson or was he not material” front.
Now the SEC and prosecutors will need to prove that by using the word “selected,” Goldman was basically lying to investors or “materially misleading” them.
What also helps Goldman is their use of a passive verb, “selected by,” rather than an active verb, “selected.” Had Goldman written, “ACA selected the RMBS portfolio,” the language would be slightly stronger and more condemning. As is, it’s looser and more open to interpretation.
In marketing materials, Goldman didn’t lie, they seem to have told a half-truth.
*Read pgs 10-11 of the SEC filing. Four RMBS disappear, then ACA presents 21 “replacement” RMBS and we don’t know if those 21 replaced some of Paulson’s 55 or if they replaced some of ACA’s selections.
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