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HOLD ON: The SEC's First Major Fraud Allegation Against Goldman Seems VERY Weak

We're now reading the SEC's fraud allegations against Goldman and Fabrice Tourre in detail

The first major allegation appears to be very weak.

The SEC alleges that Goldman failed to disclose to investors that Paulson & Co. played a role in selecting the securities that were included in the CDO in question.  Instead, Goldman merely told investors that a third-party firm, ACA, was the "Portfolio Selection Agent."

Based on a close reading of the SEC's evidence, however, Goldman likely has a strong argument that it was not required to disclose that Paulson & Co. had been involved in the selection process.


Because it is clear from the email snippets the SEC cites that ACA had full control over which securities were selected for the final portfolio. 

For example, Paulson picked 123 securities it wanted in the CDO.  ACA then sent an email saying it was comfortable using only 55 of them.  Later, ACA submitted its draft portfolio to Paulson, and Paulson requested that ACA eliminate 8 securities.  ACA agreed to do this--but it clearly still had the authority to approve--or not--the final portfolio.

So the SEC's evidence shows that Paulson was involved in the security selection.  It also suggests, however, that ACA was the final arbiter of what would be included and what wouldn't.  It seems appropriate, therefore, for Goldman to describe ACA as the "Portfolio Selection Agent."  It does NOT seem obviously necessary for Goldman to have mentioned that Paulson was involved in the selection.

Why not? 

Because dozens of things were presumably involved in the security selection.  ACA had constructed more than 20 of these products.  It had its own analysts and models.  It clearly did not just simply rubber-stamp Paulson's suggestions (on the contrary--it dinged more than half of them).

So the SEC's claim that Goldman should have disclosed Paulson's involvement in the selection process seems weak. 

And now on to the rest of the allegations...

Disclosure: Disclosure: No positions