Monday, April 19, 2010
About a year ago, Lloyd Blankfein tried to burnish Goldman Sachs' post-financial crisis image by arguing in an interview with the Times of London that Goldman was performing God's work by bringing buyers and sellers together to do deals and safeguarding the interests of shareholders. Whatever. Last Friday, the SEC provided a different view when it charged Goldman Sachs with securities fraud. Here's the complaint. The SEC Alleges that Goldman was playing both sides by assisting investor John Paulson in shorting the subprime market (through a CDS on a subprime CDO) on the one hand, and selling those shorted bonds to investors on the other hand. The details of this trade were documented in Gregory Zuckerman's The Greatest Trade Ever, but the SEC's 22 page complaint is a quicker, if not more compelling, read.
Goldman, the SEC alleges, disclosed neither its nor Paulson's role in shorting the same bonds its was selling. Was that lack of disclosure material? I don't know. But, if some Goldman trader called me and in the process of pitching these bonds to me let it drop that one of Goldman's most important institutional investors was shorting the same bonds that they were trying to sell me and that Goldman had arranged the short, I probably wouldn't invest. But, hey, that's just me.
Last Friday, just as fraud charges were released, I opened Michael Lewis' The Big Short. It's a really quick read and after I finished it I picked up the SEC's complaint. Given that I had just finished Lewis' book describing how all this went down - though not at Goldman - the SEC's complaint wasn't all that original. My first thought on all this is that there will be more lawsuits.
Sure, the SEC went after Bernie Madoff, but the Financial Crisis of 2008 was not about Madoff. He was just a symptom. Leverage and the housing bubble were at the center of the crisis. During a rational bubble it becomes a game of who is the last to get off. It's clear that Goldman got off first. With this litigation the SEC is using its enforcement powers to send a message of sorts to Wall Street - that "ripping the faces of your clients" is not the way business should run. That's probably a message that should have been sent many years ago.
In any event, with all that's going on, it should make you happy that you're an M&A lawyer!
Update: Janet Tavakoli on the fraud complaint against Goldman Sachs.