04-20-2010, 11:29 AM
|
#40 (permalink)
|
|
Junkie
|
Today's NY Times is illuminating about the nature of the SEC's suit:
Quote:
The commission’s core accusation is that while Goldman provided to those firms a detailed list of the assets contained in a security it built and sold in 2007, it concealed the role of John Paulson, a hedge fund manager who worked with Goldman to pick what assets went into the security. Mr. Paulson then placed bets that the security would lose value.
In essence, the buyers bet that housing prices would go up, while Mr. Paulson bet that prices would fall.
Goldman was not legally required to provide any information to the investors, because Goldman found the buyers without offering them on the open market. But for any information that Goldman chose to provide, it was required by law to give a complete and accurate account.
Goldman outlined its likely defense arguments in two letters sent to the S.E.C. in September in response to a notice from the agency that the company was under investigation and could be sued.
In the letters, Goldman’s lawyers at Sullivan & Cromwell wrote that the company Goldman hired to manage the deal, ACA Management, was “no mindless dupe that could be easily manipulated.” Furthermore, the letters said that the downturn of the housing market was not a foregone conclusion, and that it was therefore misleading for the S.E.C. to consider the transaction through the lens of “perfect hindsight.”
The letters went on to argue that, contrary to the S.E.C.’s assertions, Goldman disclosed all information about the deal that was material. In particular, the letters drew a sharp distinction between information about the security, which the company said it provided in full, and information about Mr. Paulson’s role.
The second letter said, “It is this concrete information on the assets — not the economic interest of the entity that selected them — that investors could analyze and use to inform their decisions.”
To win its case, the S.E.C. must prove that Goldman was not merely silent about Mr. Paulson’s role but actually gave investors the wrong impression, experts in securities law said. Then it must prove that the missing information was material, a legal term meaning that investors armed with that knowledge might have decided not to buy the product from Goldman, or to do so at a lower price.
Allen Ferrell, a law professor at Harvard, said the suit rested on an unusual definition of material information.
“We normally think of material information as specific to the mortgages, not somebody’s prediction about the future course of macroeconomic events,” Professor Ferrell said. “So who cares whether Paulson is bullish or bearish? Whatever his personal opinion is about the future course of housing prices, the question is, did the investors have access to the underlying mortgages?”
But Donald C. Langevoort, a law professor at Georgetown University, said the case was consistent with other government efforts in past years to broaden the definition of material information. “The S.E.C. has long insisted that context is important,” Professor Langevoort said. “If you think of it more broadly in that way, this isn’t an unprecedented case.”
|
So this isn't much of a cut and dried case, and (as legal cases usually do) this will turn on the definition of legal terms like "material."
|
|
|