David Min, our Associate Director for Financial Markets policy at CAP, takes issue with the Economics of Contempt analysis of the SEC lawsuit against Goldman Sachs. Before Min was at CAP he was a counsel with the Joint Economic Committee of the U.S. Congress and before that he did white-collar criminal and civil litigation litigation at Wilmer Hale and before that was a lawyer for the SEC Division of Enforcement. His take:
The key test for anti-fraud under the 1933 and 1934 Acts is did the issuer/trader mislead or not disclose a “material” fact. Materiality is a somewhat nebulous concept, but generally is described as something a reasonable investor would find important in their decision to make that investment.
Whether or not Paulson’s “significant influence” was huge or less so is pretty irrelevant imo (and probably more a sign of the fact that the SEC has some pretty green litigation lawyers than an indictment of their evidence, is my guess). The fact is, ANY investor in a CDO would want to know that Goldman had allowed a third party that had bet against that CDO to have ANY influence on that CDO’s construction. Whether that’s a ton or not much is really not a significant issue.
Furthermore, the SEC alleges that Goldman went to great lengths to have another third party (ACA) appear to be the main structurer of this CDO. This may bear on whether there are criminal charges (since there would appear to be clear intent to hide this, rather than just a material omission).
That sounds convincing to me. But, again, I’m not a lawyer and tend to hesitate to comment on specific legal controversies.