Sunday, April 25, 2010

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 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.

Wednesday, April 21, 2010

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.


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

Sunday, April 18, 2010

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.


Friday, April 16, 2010

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.

The Partnership: The Making of Goldman Sachs

Monday, April 12, 2010

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>>>

Wednesday, April 7, 2010

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?


Monday, April 5, 2010

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, 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 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 article has more on the issues relating to sales of stock by private company shareholders at here.

Mark Cuban Says SEC Tampered With Witness

 We followed the Mark Cuban SEC case with great interest. My thoughts at the time were that it was a lousy case, and the SEC was making a mistake in bringing it. (See my prior Mark Cuban SEC posts.) Many other securities attorneys and commentators expressed the same opinion. Ultimately a federal court judge agreed, dismissing the case finding that the SEC could not win under any circumstances. The SEC appealed, and that appeal is still pending.

During the case, Cuban struck back and filed a suit against the Commission alleging that they violated the Freedom of Information Act. My post about that suit is here. That case is also still pending.

Now he is hitting harder. He is seeking sanctions against the SEC for bad faith in bringing the original charges. According to the WSJ, in the course of that discovery, Cuban learned that senior attorneys at the Commission were snickering about him in emails, swapping  promotional pictures of him from a television show, and negatively commenting on him as a person, as they were investigating and filing charges.

Bad enough. However, there is also an allegation that the SEC attorney handling the case attempted to prevent an employee of a brokerage firm from speaking with Cuban's attorneys. According to the article, the employee's firm's general counsel was told that the SEC "preferred" that the GC not allow the employee to speak to Cuban's attorneys.

Regulators are sometimes accused of improper motive in conducting investigations. Hopefully, such allegations are not true, but in most instances, the defendant does not have the financial resources to investigate the allegation and prosecute a claim.

This case is different, and the SEC has a tiger by the tail. They brought a questionable case, against a public figure, and one has to wonder just what they were thinking in bringing that case. Mark Cuban may well find out exactly what they were thinking, and may just make them pay for bringing a claim in bad faith.

We will have to wait and see what happens, and how much of this is true, but given the fact that it is Mark Cuban, and not some poor unfunded registered representative, it is going to be an interesting case.

The full WSJ article, with attachments, is here.

Logos Multi-Strategy and Donum Fund Managers Plea Guilty

According to an FBI press release five church leaders from Long Island plead guilty to consipracy to commit securities fraud in connection with two hedge funds, Logos Multi-Strategy I, LP and the Donum Fund, LP.

The press release states that the defendants admitted that they conspired to market the hedge funds to prospective investors, including numerous members of their own
church, employing material misrepresentations and omissions contained in private placement memoranda and other marketing materials concerning the management, supervision, and historical and expected trading performance of the funds. In total, the defendants collected approximately $9.3 million in investments in the Logos Fund and approximately $3 million in investments in the Donum Fund.

This is yet another in a series of private placement fraud allegations that are being pursued by regulators. Investors in these funds are undoubtedly seeking securities attorneys to prosecute civil claims to recover their losses. More>>>