I’m sure many VC readers have been looking at the papers today, trying to sort out facts versus allegations, in the SEC suit against Goldman Sachs for fraud involving CDOs. The Wall Street Journal, New York Times, Washington Post, and Financial Times all have good stories, to take the papers from my front lawn.
One of those stories (they have all, ahem, melded together in my mind) remarked that if sustained in court, and quite possibly even if not, the fraud suit and the narrative it tells, has the possibility of significantly altering the perception of the financial crisis, or at least its relationship to complex derivatives. Away from a (possible, anyway one I share) perception of banks that didn’t much care about the down-stream performance of their products because they would get paid up-stream anyway – a perception of a systemically driven indifference, but not necessarily fraudulent, toward knowing, deliberately constructed malfeasance, understanding pretty well that these CDOs were headed to the dust-bin of history.
Such a shift in perception might come about regardless of whether this narrative is established as factually correct or not. Another version might be that most of Wall Street was complacent and badly incentivized, so as to not care about credit quality – whereas Goldman Sachs, being the Masters of the Universe and Smarter Than the Average Bear (Stearns -ed.), uniquely saw it coming and, in this case at least, protected itself and even figured out how to profit, but alas through fraud.
One of the problems with trying to say much at this stage about the legal analysis is that it is so factually driven. If the facts are as the SEC alleges, well, then, bad, bad Goldman!! But on these allegations, there’s not a lot of room for legal nuance, although I am happy to be corrected on that in the comments, not being a securities litigator. So, here’s my question for the comments. Assume that the facts are as alleged. In that case, is there an important legal issue, or is it the application of straight securities fraud principles? Is there an alternative, plausible reading of the facts? And is there an alternative, plausible factual reading that creates an important legal question?
That’s with respect to the fraud case on its own. Assume the facts as alleged by the SEC. What would that argue as a matter of long term regulatory reform in financial markets and institutions and regulation? Although, frankly, at this stage, I’m more interested in the comments in trying to see whether there’s an important legal issue in the case at hand, as a legal issue. As the New York Times Room for Debate blog exchange seemed to show, at this stage the systemic lessons people seem to be drawing out of the suit against Goldman are pretty much whatever they thought before the suit against Goldman.