We’re re-posting it as the SEC settlement with Goldman Sachs is pretty much what was predicted.
We haven’t had time to review the SEC’s fraud allegations against Goldman Sachs (GS) and 31-year-old senior vice president, Fabrice Tourre, in detail yet, but we’ve scanned them.
Based on the scan, we have not seen any screaming smoking guns. There is certainly evidence that Goldman and Tourre said one thing internally and another externally. It also appears that the information that was omitted in the external marketing materials would likely have been of interest to investors.
That’s not proof of fraud, but, as represented by the SEC, it looks bad. Goldman will want to make it go away (read: out of the headlines) as quickly as it can.
Importantly, this is NOT a criminal indictment. It is a civil lawsuit. The SEC and Justice Department usually work together, so the absence of a criminal charge suggests that the Justice Department did not feel criminal charges were warranted.
So here’s what’s likely to happen to both parties:
Goldman Sachs will have to write a big check, and then it will be fine: Goldman will likely say the charges have no merit and then, in a month or two, settle with the SEC for a few hundred million dollars (chicken feed). Goldman will then defend itself against the civil lawsuits that arise from this and probably settle those as well. There may also be follow-on lawsuits for other CDOs and products Goldman created. Those, too, will likely be settled or dismissed. Bottom line: This will cost Goldman some money, but not enough to matter to investors.
Fabrice Tourre will be placed on administrative leave or fired (a.k.a., thrown under the bus). He will then spend the next couple of years testifying in this and other follow-on civil lawsuits. The SEC will probably demand a cash settlement from him, too, and boot him out of the industry. Based on our scan of the allegations, Tourre was involved in every aspect of the structuring and marketing of the CDO in question. The complaint includes snippets of communications in which Tourre describes the CDO one way internally and another way externally. Again, this is not proof of fraud, but, at least as represented by the SEC, it looks bad. Tourre will likely want to fight the charges, especially if he thinks they’re b.s., but it will be too risky and expensive for him to do so, so he’ll likely settle. Having made such public allegations, the SEC will make sure that any settlement produces an appropriately tough-looking headline (thus the fine and industry dismissal).
UPDATE: We have now read the SEC’s allegations in detail. The case againt Goldman actually seems very weak. The case against Fabrice Tourre is stronger, but it’s still no slam dunk. Read more >