Goldman's Defense to SEC Fraud Case

The WSJ has copies of Goldman's Wells Submission and its Wells Supplement on line. While the Wells Submission is not Goldman's answer to the complaint, it does offer insight into Goldman's defense of the SEC's claims. (See my article on Wells Notices at SECLaw.com for more background information).

The most interesting part of the submission is the claim that everyone in the transaction knew the facts that the SEC claims were misrepresented or omitted:

There was nothing unusual or remarkable about the transaction or the portfolio of assets it referenced. Like countless similar transactions during that period, the synthetic portfolio consisted of dozens of Baa2-rated subprime residential mortgage-backed securities (“RMBS”) issued in 2006 and early 2007 that were identified in the offering materials (the “Reference Portfolio”). As in other synthetic CDO transactions, by definition someone had to assume the opposite side of the portfolio risk, and the offering documents made clear that Goldman Sachs, which took on that risk in the first instance, might transfer some or all of it through a hedging and trading strategies using derivatives. Like other transactions of this type, all participants were highly sophisticated institutions that were knowledgeable about subprime securitization products and had both the resources and the expertise to perform due diligence, demand any information that was important to them, analyze the portfolio, form their own market views and negotiate forcefully at arm‟s length.

And this:

All participants in the transaction understood that someone had to take the other side of the portfolio risk, and the offering documents clearly stated that Goldman Sachs might lay off some or all of the short exposure to the portfolio that it had taken on. A disclosure that the relatively unknown Paulson was the entity to which Goldman Sachs transferred that risk would have been immaterial to investors in April 2007.

As always, there are two sides to every story, and the other side of this one is still developing.

The Problem with Litigation is Losing - Pitt on Goldman

Former SEC Chairman and corporate litigator Harvey Pitt puts forth his views on the SEC's complaint against Goldman Sachs. He raises some interesting questions, revolving more around the impact of an SEC loss in the matter, rather than a win.

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Related Book: Chasing Goldman Sachs: How the Masters of the Universe Melted Wall Street Down . . . And Why They'll Take Us to the Brink Again

Impact of SEC CDO Fraud Case Against Goldman

An analysis of the impact on investor claims of the SEC CDO fraud complaint against Goldman Sachs.

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SEC Charges Goldman Sachs in CDO Fraud

In a complaint filed in the Southern District of New York, the SEC has filed civil charges against Goldman Sachs, alleging that it structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). The Commission alleges that Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO. The SEC Press Release contains more details and a copy of the complaint.

Schwab Continus ARS Fight

Charles Schwab Corp. continues its fight with New York Attorney General Andrew Cuomo over its sales of auction-rate securities to investors.

Cuomo claims that Schwab sold the securities fraudulently. Cuomo made similar claims against 14 other securities firms, which settled with him. Schwab is seeking dismissal of the complaint that New York filed last August. More>>>

Fifth Third Gives President $2 Million Raise with TARP Money

Fifh Third Bancorp, which received $3.4 billion in TARP funds, which have not been repaid, just gave its CEO a 56% raise, to $5.2 million. I thought this was an April Fool's joke, but no, here it is, in a Reuter's article.

The article also points out that PNC Financial, Regions Financial and KeyCorp, all of which owed billions of dollars to taxpayers at the end of 2009—also increased their chiefs' pay.

I am all for free market salaries, and properly compensating corporate executives, but did the concept of a pay freeze while borrowing money from the US taxpayer even cross their minds?

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Facebook Tells Employees Not to Sell Shares

Facebook has an interesting problem - it is in danger of having too many shareholders, an outcome that is being made possible by online trading sites like Sharespost.com, which allows shareholders in private companies to sell their shares to others.

There are plenty of issues surrounding these sites for private companies, including not knowing who your shareholders are, and having your shares too widely dispersed. One of the more significant issues however, is Section 12(g) of the Securities Exchange Act of 1934. That section requires a private company with total assets in excess of $10 million and 500 or more record holders of a class of equity security, to register the class of equity security with the SEC, unless it has an exemption from such registration.

(The SEC has a plain English explanation of the rule and filing requirements in "Q&A: Small Business and the SEC - A guide to help you understand how to raise capital and comply with the federal securities laws").

Facebook is concerned that the expansion of its number of shareholders to 500 will force it to go public before management decides that it is time to do so, and has enacted a policy to attempt to forestall that event.

According to a Law.com article, the company has enacted a prohibition on the sale of securities by its shareholders to limited periods of time when a "trading window" is opened. Trading windows are commonly found in public companies, and permit sales by employees only during these specific time periods. The policies are designed to prevent insider trading, or more to the point, to limit allegations of insider trading, by preventing trades except has previously designated times, under particular procedures set by the company.

The use of a similar policy by a private company is an interesting development, and one has to question whether it is a legitimate corporate policy - in the private context. Corporations have the ability to restrict transfers or sales of their stock. Those restrictions are commonplace in small corporate entities, and I have written dozens of such policies over the years - typically requiring the selling shareholder to offer the stock back to the corporation, or the other shareholders, either at a pre-determined price, or a price set by some other calculation.

Those policies are a creature of contract - the shareholder agreed to that provision when he acquired his shares. However, the Facebook prohibition appears to be a condition placed on the shares after purchase or acquisition, and could be viewed as a unilateral modification of the underlying agreement.

Obviously an examination of the underlying documents would be required in order to determine the validity of the prohibition and I am confident that Facebook already has restrictions on transfers of its shares. The problem is that the requirement that the shares be offered to the company first can become a financial drain on the company, forcing it to use its capital on purchases at unrealistic prices.

Whether trading blackouts and trading windows are the answer remains to be seen. The Law.com article has more on the issues relating to sales of stock by private company shareholders at here.