Would you have sympathy for a professional auto mechanic who bought a lemon after given the opportunity to examine the car beforehand? Few people probably would, since if anyone should have known better, he should have. Yet, in its case (.pdf - brief synopsis here) against Goldman Sachs, the Securities and Exchange Commission needs the court to develop a very similar sort of sympathy for German IKB bank and other large sophisticated investors who purchased a synthetic collateralized debt obligation (CDO) from Goldman. Even under the circumstances of the case, it's extremely difficult not to feel that IKB should have known better.
Not just anyone invests in synthetic CDOs and other asset-backed securities. Buyers are limited to big, sophisticated investors. After all, IKB purchased $150 million worth of the bonds in the deal -- only a serious investor has that kind of cash to spend. This wasn't a case where Goldman cold-called a guy who works at a tire factory to trick him into buying a wacky security. IKB should have had the resources and motivation to understand what it was buying.
The Collateral Wasn't Misleading
IKB's sophistication wouldn't matter if Goldman lied to the German bank about what was in the portfolio that the bonds were based on. The SEC doesn't allege that. Instead, the complaint says that Goldman didn't disclose that a hedge fund manager, John Paulson, played a role in creating the pool of securities. While that may or may not be found to be material, it's hard to imagine how it would have made a difference to IKB. The collateral would have been the same either way, and IKB had the opportunity to perform its own analysis on the pool's potential performance. There's no input in a cash flow model for evaluating a CDO that takes into account the parties influencing the collateral pool's creation.