Wednesday, April 21, 2010

Markets Respond To The SEC's Securities Fraud Lawsuit Against Goldman Sachs

On April 16, 2010, the SEC announced it's civil lawsuit against Goldman Sachs based on securities fraud. Accusing Goldman Sachs of lying to its investors, the SEC alleges that the investment company deliberately failed to disclose that its collateralized debt obligation packages, which relied on the performance of sub-prime residential mortgage-backed securities, had been designed to fail by hedge fund Paulson & Co., which took short positions against the mortgage securities and ultimately generated billions of dollars in profits at investors’ expense. The SEC further asserts that Goldman Sachs’ actions are in direct violation of the company’s business principals, which state that its clients’ interests always come first. The complaint filed by the SEC charges Goldman Sachs with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5.

On Friday, the news of the lawsuit instantly caused Goldman Sachs’ stock to plunge by 13%, to $166.70, destroying over $10 billion of the company’s market value. To make matters worse, Wall Street analysts predict that the SEC, after being sharply criticized for failing to uncover the causes of the financial crisis, is cracking down on companies that have a link to the mortgage crisis. In anticipation of future charges and heavy fines, analysts downgraded Goldman Sachs’ stock. Goldman Sachs issued a statement saying it would vigorously contest the lawsuit and defend the firm’s reputation. Goldman Sachs is concerned about its reputation only to others on Wall Street.

What is particularly troubling about the back dealings of Goldman Sachs is the craps game the industry played with sub-prime residential mortgages. While Goldman Sachs gambled, low-income communities suffered and continue to suffer from the foreclosure consequences of sub-prime mortgage lending. Few of us are surprised by these antics, but it sure gets me “dang” fired up when I am reminded of just how much money Wall Street makes at the misery of our communities. Where is the harm to reputation for disregarding the families facing foreclosure!


  1. This GS debacle is completely & utterly disgusting. As a former GS employee, I was working for an investment division when the sub-prime mortgage firestorm hit the American landscape. Trust me, it was not a fun atmosphere. What's so frustrating, however, is how I actually thought GS was one of the "good guys" (or more accurately, "least bad guys"). All the propaganda meetings and email from the company brass drilled that notion into our collective heads. GS needs to be held accountable - in a big way.

  2. Thankfully, Goldman Sachs is finally being held accountable for its actions. But lets not forget its role in the Greek crisis as well. Thanks to Goldman Sachs' "nip and tuck" maneuvers, in 2002 Greece managed to get an additional $1 billion in credits, which was not included in its debt stats and which will only excacerbate its problem.

  3. This story is unbelievable. Corporate greed knows no limits. I think Ms. Barclift hit it right on the head when she said that Wall Street made money on the misery of communities. People were not able to see past the short run and lined their own pockets without worrying about how this would effect the economy as a whole. Further more the fact that Goldman intentionally created instruments they knew to be bad to bet against them is incredible. I am not even so interested in the SEC civil action but in the possibility of criminal charges being filed against these crooks. I guess the lesson here is if you are going to commit crime just make sure its white collar, that way you won't be punished.

  4. I am not surprised that Goldman Sachs is being held accountable. What does surprise me is that it took this long. The amount of damage caused is close to irreversible. I wonder if investigations will be conducted into the finances of large companies that they advised. Funny they are known for their keen business advice. I wonder if they took their own? It will be interesting to see how this plays out in a civil court setting. It will take years for criminal charges to surface, for the right price. A price that Goldman Sachs can more than likely afford.

  5. The Federal Government has a very poor track record in managing financial affairs.
    While it appears GS will be held accountable, I don't believe the government should add another agency to handle investments specifically. We have several government agencies already doing this!
    Granted, GS is rotten, but it looks like the real reason for the case is to protect the SEC and get the financial reform bill passed...

  6. Goldman Sach's behavior is a clear violation of 10b(5). Their failure to disclose material information to investors was clearly intentionally done to defraud investors. Furthermore, Golden Sach's has violated the fiduciary duty that they owe to the corporation and shareholders. I look forward to seeing the outcome of this case.

  7. Drew Sietsma –
    Following the investigation into the alleged wrongdoing of Goldman Sachs by the SEC, I expect to see a stockholder action based upon these facts. If proven, this represents a theft perpetuated by a corporation at the expense of investors in clear violation of Rule 10b-5. This type of fraudulent transaction has brought the financial industry to complete disgrace and has caused irreparable harm to the reputation of all financial institutions. It is good to see that the SEC is finally going after the entities whose greed caused the current financial woes for millions of hard-working individuals.

  8. Candace Cronan-

    One issue is the nature of the fraud and whether the methods were applied to other transactions within GS.

    An article on Reuters gives some insight into how lawyers for GS shareholders are studying legal action against GS, noting that it may be difficult to build a case-

    Regarding the "fraud" charges, it remains unclear just how far the fraudulent action reaches.
    "The scope of this conduct is undoubtedly quite broad and it remains to be seen whether the Abacus transaction is unique as Goldman claims," said Thomas Dubbs, a partner at law firm Labaton Sucharow.

    Perhaps one of the most important things to remember is the international scope of GS's activities and the importance of ALL regulators to become involved and launch appropriate inquiries.
    "Given the international scope of Goldman's activities involving these sorts of transactions, it is incumbent upon all regulators, including the FSA, the SEC and U.S. state governments, to launch appropriate inquiries."

  9. Michael RosenbergApril 28, 2010 at 9:57 AM

    I don't understand why it is so had to tell the full and complete truth. All we hear about in the media from companies is corporate responsibility this and corporate responsibility that. Why isn't truth corporate responsibility?

    Perhaps selling a company's stock is a more effective form of punishment--one enforced by society. Taking away corporate assets is a good way to get a company's attention. Granted this must be done by shareholders, but this would be an effective way to get the Board's attention.

    It's a simple concept--tell the truth!

  10. Mr. Rosenberg you hit the nail in the head. It seems as if GS simply can not tell the truth, to congress and their own clients. They bet against risky investments and then sell the very same investments to their own clients. There is something fundamentally wrong with this and a message needs to be sent to corporations that they cannot stab their own clients in the back. I look forward to seeing how this case concludes.

    - Jonathan Haskell

  11. GS investing in securities that they believed would fail, "inconceivable" the Sicilian said. Inigo Montoya replies "I do not think that word means what you think it means." Basically, as a culture we do not seem to be effected by things we cannot personally see, touch, taste, or feel. A man sitting in office in Wall St. deals with money on a computer screen and lives his life by the zeros and commas. He does not count out bill by bill the millions he makes or loses (he might get paper cuts). You can't expect him to really "feel" emotionally or physically the plight of the people his/her actions may affect.
    This is why, when concerned with secularized mortgages I argue that the American people should start at the state level. Remember, none of these mortgages would have been nearly as risky if they had been properly regulated at the state level. Somebody in the state governmental structure messed up. They failed to protect the consumer/purchaser of homes. This type of action would probably be much more effective and expedient in not only adjudication but also in uncovering facts that might directly lead to the misconduct by companies such as GS. Maybe the SEC should try working conjointly with some State Attorneys.

  12. I absolutely agree that Goldman Sach's should be put on trial. This type of public exposure is what they needed. i fail to remember which news media wrote the article, but the article basically said that Goldman Sach's investors weren't too worried about the earlier drama that unfolded because it was a corporation, doing business, what it's meant to do, which is make money for it's investors. HOwever, with allegations flying around that GS lied to their consumers about the profitability of an investment, then there is a problem. As Ravi said, people don't seem to be effected unless it's not personal to them. This, was personal, and that is why their stocks have fallen.

  13. Goldman exccutives should all go to jail for defrauding investors. Only bailout they should have gotten was from a bondsman