Sunday, April 25, 2010

Goldman's Defense to SEC Fraud Case

The WSJ has copies of Goldman's Wells Submission and its Wells Supplement on line. While the Wells Submission is not Goldman's answer to the complaint, it does offer insight into Goldman's defense of the SEC's claims. (See my article on Wells Notices at for more background information).

The most interesting part of the submission is the claim that everyone in the transaction knew the facts that the SEC claims were misrepresented or omitted:

There was nothing unusual or remarkable about the transaction or the portfolio of assets it referenced. Like countless similar transactions during that period, the synthetic portfolio consisted of dozens of Baa2-rated subprime residential mortgage-backed securities (“RMBS”) issued in 2006 and early 2007 that were identified in the offering materials (the “Reference Portfolio”). As in other synthetic CDO transactions, by definition someone had to assume the opposite side of the portfolio risk, and the offering documents made clear that Goldman Sachs, which took on that risk in the first instance, might transfer some or all of it through a hedging and trading strategies using derivatives. Like other transactions of this type, all participants were highly sophisticated institutions that were knowledgeable about subprime securitization products and had both the resources and the expertise to perform due diligence, demand any information that was important to them, analyze the portfolio, form their own market views and negotiate forcefully at arm‟s length.

And this:

All participants in the transaction understood that someone had to take the other side of the portfolio risk, and the offering documents clearly stated that Goldman Sachs might lay off some or all of the short exposure to the portfolio that it had taken on. A disclosure that the relatively unknown Paulson was the entity to which Goldman Sachs transferred that risk would have been immaterial to investors in April 2007.

As always, there are two sides to every story, and the other side of this one is still developing.
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