Saturday, July 17, 2010
I was thinking last night about the criminal law implications of the Goldman-SEC settlement. The settlement only confirms what has been fairly apparent from the get-go--this was never a strong fraud case. The SEC extorted a nuisance payment from Goldman and simultaneously sent a signal to the markets that it is serious about its new proactive role.
If the SEC thought that it had a winner, it never would have settled on these terms. Goldman essentially pays 14 days in first quarter profits, admits to a mistake, and agrees to strengthen some aspects of its corporate governance. Goldman avoids lengthy, costly, profit-threatening, and Pandora's Box-opening litigation. And no big shots are forced to resign. When you have to caution your employees not to whoop, holler and smirk in the wake of such a settlement, you know you have made a good deal.
Oh yeah. Goldman agrees to cooperate in the SEC's probe of Fabrice Tourre. All this means is that Goldman's people will come in and talk to SEC attorneys. Tourre has already done plenty of talking himself to Congress, in public and under oath. This was foolish, in my view, for somebody in his position. But it is unlikely that any prosecutor will go after Tourre alone. Goldman was a market-maker here, the parties were sophisticated, and Tourre was hardly off the reservation. Some player's misunderstanding of John Paulson's position, even if caused by a Goldman mistake, is not the same thing as an intentional effort to deceive and defraud.
A key early sign that this was not going to be some slam-dunk fraud action was the SEC's press conference statement, on the day it filed suit, effectively clearing Paulson & Co. of wrongdoing. The SEC, unlike private litigants, can sue, under Rule 10b-5, based on aider and abettor liability. According to the public record, Paulson & Co. took part in several key discussions between Goldman and ACA Capital Management during the time period that the Abacus 2007-ACI CDO deal was being structured. If the SEC seriously believed that big-time fraud was afoot in the Abacus 2007-ACI CDO transaction, it is hard to believe that Paulson & Co. would have been treated in this fashion. If I were a government attorney and thought I had the fraud of the century on my hands, I would want to rope in every potential aider and abettor, and would think very carefully before giving a significant player in an allegedly fraudulent transaction a publicly announced clean bill of health. This is not to say that Paulson & Co. engaged in any wrongdoing. It is instead to suggest exactly the opposite.
So, I do not expect any criminal cases to come out of Abacus 2007-ACI. Of course I have been wrong before. In 1972 I thought McGovern would kick Nixon's ass. But here I will go out on the limb.