The bank's recent settlement with the SEC could come into play in more ways than one
On Thursday, we learned that the Manhattan district attorney and New York state had subpoenaed Goldman Sachs. Some commentators have suggested that the action may be part an attempt to set up a criminal investigation based on a recent Senate report that accuses the banking behemoth of having acted improperly in its efforts to short the mortgage market as the bubble began to burst. Will the bank be able to wiggle out of these allegations if a criminal case is brought?
For a fairly detailed explanation of the law likely to be involved in a case against Goldman, check out the post I wrote on Thursday. It boils down to this: if a court deems its mortgage market shorting strategy as "material information" that investors should have been provided when Goldman sold them mortgage exposure, then Goldman might be in trouble. There are a few ways to look at this question.
Will the SEC Settlement Come Back to Haunt Goldman?
First, a similar issue was actually at the heart of last year's Securities and Exchange Commission lawsuit against Goldman. In that case, the SEC said that Goldman should have notified an investor (ACA Management) that it sold mortgage exposure to through a complex security that a prominent hedge fund manager (Paulson & Co.) helped to select the assets that the security referenced. The SEC asserted that this information was material. As a part of the settlement, Goldman didn't exactly concede wrongdoing, but said:
The firm entered into the settlement without admitting or denying the SEC's allegations. As part of the settlement, however, we acknowledged "that the marketing materials for the ABACUS 2007-ACI transaction contained incomplete information. In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was 'selected by' ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson's economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure."
Now think about the mortgage securities that Goldman sold to investors on which it took the other side of the bet. If it didn't disclose that Goldman's "economic interests were adverse" to those investments, isn't that a similar problem?