Goldman's Expanded Response to the SEC

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Goldman Sachs released an expanded response to the SEC's suit (.pdf) late Friday. A brief synopsis of the situation can be found at the top of this post. Earlier in the day, the bank had released just a one-sentence statement, denying culpability. The additional detail provides a glimpse of how the bank intends to fight the complaint. The response makes four points:

• Goldman Sachs Lost Money On The Transaction.

The bank notes that it was net loser on the transaction. While interesting to note, this assertion has nothing to do with the SEC's claim that Goldman misled investors. At best, it could cause a court to question if the profit-seeking motive the SEC's complaint implies makes sense in the context of a money-losing deal.

• Extensive Disclosure Was Provided.

Here, Goldman essentially says that the disclosure it provided was sufficient. The defense would appear to imply that Goldman believes John Paulson's influence in selecting the portfolio was not material to investors, because they could analyze the investment on its own merits adequately. This will boil down to a question of law in determining whether the disclosure of all influences in choosing a security's portfolio is necessary.

• ACA, the Largest Investor, Selected The Portfolio.

Goldman says that ACA was ultimately responsible for the portfolio and had an incentive to pick a good one. This is true, but like the first assertion above, this point has nothing to do with the SEC's complaint that Goldman misled investors. The bank likely hopes a court will question why ACA would assist Goldman in misleading investors through Paulson. Of course, ACA wouldn't, which is why the SEC believes Goldman misled the firm as well.

• Goldman Sachs Never Represented to ACA That Paulson Was Going To Be A Long Investor.

This is a hugely important point, because it's the first time we see Goldman refuting any of the facts of the SEC's case. The SEC says that Goldman told ACA that Paulson would be a long investor, so ACA believed its interests were aligned with Paulson. Yet, the SEC complaint appears to include some evidence showing that Goldman did, in fact, lead ACA to believe Paulson would be going long. Here's what the SEC complaint says on this matter:

47. On January 10, 2007, Tourre emailed ACA a "Transaction Summary" that included a description of Paulson as the "Transaction Sponsor" and referenced a "Contemplated Capital Structure" with a "[0]% - [9]%: pre-committed first loss" as part of the Paulson deal structure. The description of this [0]% - [9]% tranche at the bottom of the capital structure was consistent with the description of an equity tranche and ACA reasonably believed it to be a reference to the equity tranche. In fact, GS&Co never intended to market to anyone a "[0]% - [9]%" first loss equity tranche in this transaction.

48. On January 12, 2007, Tourre spoke by telephone with ACA about the proposed transaction. Following that conversation, on January 14, 2007, ACA sent an email to the GS&Co sales representative raising questions about the proposed transaction and referring to Paulson's equity interest. The email, which had the subject line "Call with Fabrice [Tourre] on Friday," read in pertinent part:

"I certainly hope I didn't come across too antagonistic on the call with Fabrice [Tourre] last week but the structure looks difficult from a debt investor perspective. I can understand Paulson's equity perspective but for us to put our name on something, we have to be sure it enhances our reputation."

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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