• April 16, 2010

Not news specific to Minnesota civil litigation but still of interest:

The stock market is “roiling” today and the consensus appears to be that it is due to the SEC’s charges brought today against Goldman Sachs in United States District Court, Eastern District of New York.

The allegations, in short, are as follows:  Goldman Sachs is alleged to have created an investment made up of a pool of mortgages (asset-backed security collateralized debt obligations or “ABS CDOs”), for which Goldman Sachs was paid $15 million by another company, Paulson.   Goldman Sachs sold this investment to third parties.

At the same time, Paulson was making big bets that the investment that it put together with and for Goldman Sachs was a disaster.  We know now, of course, that Paulson won its bets in a big way.  The unfortunate investors in Goldman Sach’s CDO were not so lucky, losing a billion dollars.

As with so many claims of financial wrong-doing involving intermediaries (which is to say, almost every claim of financial wrong-doing), the question may boil down to, “What did they know and when did they know it?”

In January and February, 2007, the S.E.C. complaint shows that Goldman Sachs (that is, the Goldman Sachs employee who is a named defendant in this fraud case) thought, “The whole building is about to collapse.”  Another internal Goldman Sachs executive’s email said, “the cdo biz is dead we don’t have a lot of time left.”

In the following months, Goldman Sachs allegedly went out to the market-place with the product created by Paulson, whose role and identity were not clearly disclosed in marketing materials and, indeed, the S.E.C. alleges that Paulson was falsely and misleadingly suggested to be investing, itself, in the investment that it was, in fact, betting against.

From Reuters:  The SEC lawsuit was assigned to U.S. District Judge Barbara Jones, who was appointed to the bench by President Bill Clinton. She presided over the 2005 criminal trial of former WorldCom Inc Chief Executive Bernard Ebbers over an $11 billion accounting fraud at the phone company.  The case is SEC v. Goldman Sachs & Co et al, U.S. District Court, Southern District of New York, No. 10-03229.

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