As we described yesterday, the SEC’s fraud evidence against Goldman appears to be weak. The SEC also appears to have omitted a key fact from its complaint that really hurts its case and credibility.
To review, here’s the first major allegation the SEC made against Goldman:
- Goldman failed to disclose to investors in the ABACUS CDO that Paulson & Co. had been involved in selecting the securities included in the CDO.
The key fact the SEC omitted in its complaint severely weakens this charge:
The “portfolio selection agent” that had ultimate authority to select the securities in the CDO was also the lead investor in the CDO. This firm, ACA, worked with Paulson & Co. to structure the transaction.
In other words, the main investor that Goldman allegedly duped, ACA, knew full well that Paulson was involved in selecting the securities in the CDO–because it worked with Paulson when it structured the deal. So it will be IMPOSSIBLE for the SEC to argue that Goldman “failed to disclose” Paulson’s involvement to ACA.
Goldman does not appear to have told a second investor in the CDO, IKB, that Paulson was involved in selecting the securities, so the SEC may have a case there. But the idea that the lead investor, ACA, was unaware of Paulson’s involvement is preposterous. And in the interest of preserving its credibility, the SEC should have included that fact in its complaint.
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