Here's The Disclosure The SEC Wanted: Would It Really Have Made A Difference?


In its Wells Submission protesting its innocence to the SEC, Goldman directly addressed the “lack of disclosure” that the SEC has used to charge it with fraud.

Goldman’s attorneys went so far as to draft hypothetical disclosure language that might have satisfied the SEC’s concern. 

Goldman contends that this disclosure would merely have described the standard give-and-take involved in structuring these complex, customised securities–give-and-take that Goldman contends was known to all parties in the transaction. 

Goldman also contends that this disclosure would not have surprised or made any difference to the two sophisticated investors who bought the Abacus CDO.  We agree.

From Goldman’s response:

That [the portfolio selection agent] ACA had input from interested participants does not diminish its exclusive authority to select the portfolio, its thorough review of each security included using its proprietary analytic models, and its complete satisfaction with the resulting portfolio as evidenced by its investment of its own cash in the deal.

We also pause to consider precisely what the additional disclosure advocated by the [SEC] Staff would say. Based on our discussion at the September 15 meeting, Goldman Sachs understands that the Staff apparently has in mind the addition of a disclosure such as the following:

The Portfolio Selection Agent may, from time to time, receive recommendations as to the content of the Reference Portfolio from third parties, including third parties whose interests are adverse to those of the noteholders. The Portfolio Selection Agent may consider and accept or reject such recommendations, with the result that any or all of the Reference Obligations may have initially been proposed by such third parties, and that Reference Obligations originally proposed for inclusion by the Portfolio Selection Agent may be deleted from the Reference Portfolio. Investors should review the list of Reference Obligations set forth herein and conduct their own investigation and analysis with respect to the creditworthiness of each Reference Obligation.

Such a disclosure would provide a potential investor with no information the investor did not already know, since the dynamics described represented a regular course of dealing in the market.    A disclosure more narrowly tailored to the facts of the 2007-AC1 transaction would convey even less. For example, a potential disclosure of the discussions at issue here might read:

The Portfolio Selection Agent has received recommendations as to the content of the Reference portfolio from third parties, including a third party that intends to take a short position with respect to the Reference Portfolio (the “Third Party”). The Third Party initially suggested 123 securities to the Portfolio Selection Agent. The Portfolio Selection Agent evaluated these 123 securities, rejected 68 of these securities, accepted 55 of these securities and proposed an additional 31 securities. The Portfolio Selection Agent later proposed an additional 26 securities. Goldman Sachs requested that two of the proposed securities be rejected, and the Portfolio Selection Agent suggested three replacements. After a meeting between the Portfolio Selection Agent and the Third Party, the Portfolio Selection Agent circulated a spreadsheet of 100 securities, including the securities that the two parties had agreed upon, as well as several additional securities. The Third Party requested removal of eight of these securities and Goldman Sachs requested removal of two other securities. The Third Party then circulated a list of 90 securities. The Portfolio Selection Agent requested removal of 3 securities and proposed 11 alternative securities, 3 of which were agreed upon by the ThirdParty. The parties than further discussed the substitution of a handful of securities and settled on the final portfolio.

The bottom line is that no amount of disclosure would change that the very
sophisticated investors already knew that some entity or entities by necessity had to take a short
position, and that any and all participants – including themselves – might express their views as
to the reference portfolio. None of these descriptions contains any concrete, analyzable
information that might educate the sophisticated institutional investors that typically purchase
synthetic CDOs. Regardless of who selected them, the offering documents for each of the
reference securities disclosed detailed information on their underlying assets, as required by
Regulation AB. It is this concrete information on the assets – not the economic interest of the
entity that selected them – that investors could analyse and use to inform their decisions.

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