WHERE IS THE SEC's CASE AGAINST GOLDMAN SACHS?

Should Goldman Sachs Really Be Worried? (Find the Link to the SEC's Full Complaint Below!)

The SEC's case against the financial giant Goldman, Sachs & Co. is questionable at best. The SEC complaint does not have the prosecutorial teeth you would come to expect from the U.S Gov't.

The Gov't's case: Goldman failed to disclose that a hedge fund manager, Paulson & Co., bet against the same mortgage securities Goldman had offered to its own investors. It's also alleged that Goldman conceiled that these highly risky securities were essentially cherry-picked for Paulson specifically for their promise to fail.

Failed mortgage securities that are insured by derivatives or (Credit-default swaps) pay highly speculative big money. In this case, Paulson's share was $1 billion.

The problem with the Gov't's case seems two-fold. The securites in question were Triple-B rated, which is the lowest-riskiest-junkiest type of security bond available on Wall Street. There's no controversy over the low-grade nature of the bonds. There's no allegation regarding the performing expectations of these highly risky mortgage securites.

The complaint does not specifically allege that investors should have had better disclosure about the risky nature of the securities themselves. The very triple-B nature of the securities was apparently "buyer beware" enough.

The second problem with the SEC's case is that although the Gov't alleges to have jurisdiction, the dispute solely hinges upon representations Goldman made on "marketing material". Really? Marketing material? Highly skilled and knowledgeable portfolio managers were fooled by brochures?

The SEC does not regulate "marketing material" do they? They regulate the exchange of securities hence their title, and no said securities exchange is expressly alleged in the complaint to have been illegally conceived. Instead the Gov't's emphasis is mainly on the obscurity of this Paulson fellow during the structuring of this massive deal.

Paulson, who purchased the derivative insurance against the fund's default, was not identified to investors as a participant in the fund's selection process. The SEC alludes to the notion that investors may not have participated with the highly risky fund if they knew Paulson had a contradictory short position.

That is highly speculative since investors take short positions on risky mortgage-backed securities all the time. It wouldn't make much sence to short a triple-A security because the derivative profit is in its failure. Agency conforming borrowers have good credit and plenty equity, they fully income qualify for their home loan and their paper performs well most of the times.

There's a much greater probability that the junkiest triple-B securities will fail so it makes more sence to short those. The probability of the AAA good stuff failing, not so much.

http://www.sec.gov/litigation/complaints/2010/comp-pr2010-59.pdf