Is Henry Blodget right to pooh pooh the SEC case against Goldman?

Henry Blodget, famed analyst from the dot com bubble (which he helped created), thinks the SEC case against Goldman Sachs is weak. I beg to differ and suggested to him the following:

If Goldman knew of a material omission in the offering documents that they prepared and distributed to investors they are a primary violator of the securities laws and can be held liable under provisions of both the 34 Act and the 33 Act.  Even if they could establish they had nothing to do with the actual preparation and distribution of the materials but only aided and abetted the fraud they could be subject to liability for a knowing violation of the law by the SEC though not by private lawsuits.

The material omission here is that they did not tell investors (or ACA) about Paulson’s actual role.  Your argument hinges on the omission not being material because of ACA’s role.  If your theory is correct then a crime was committed without a criminal since you argue it was all ACA’s fault.  But it appears from their complaint that Paulson indeed influenced the final portfolio.  In any case, ask any rational investor if they would have wanted Paulson’s role (in numerous meetings during the preparation and selection process) revealed prior to their investment decision. I cannot imagine anyone saying they would not care.

Of course, the SEC still has to back up its complaint in court in front of a judge and jury but assuming for the sake of argument the complaint is true then I think you are wrong in suggesting the case is weak.  It actually looks quite straightforward and my guess is that the SEC was very careful in their selection of which transaction to go after and which targets to go after. The email trail for example is quite compelling and will likely be right up front in the opening statements on big boards for the jury to see.

HOLD EVERYTHING: The SEC’s Fraud Case Against Goldman Seems VERY Weak.

2 Comments


  1. Ralph, Thank you for your detailed comment. As it turns out I am a securities lawyer by training and I have taught securities law for a decade. I stand by my original claim – in agreement with the SEC – that if there is a material fact that Goldman left out then it would be the basis of a cause of action under Section 10b.

    I believe you are mixing in to your analysis situations where there is no duty to disclose material facts because there is no active effort underway by an issuer to sell securities. Of course the mandatory disclosure regime in the federal securities laws does not require that every material fact be disclosed. If it did companies would do nothing more than disclose all day long! But when the failure to disclose a material fact comes while offering a security liability can follow.

    Here, of course, as I suggest in further posts the unanswered question is whether in fact the Paulson role was material. As you point out there may be some counter arguments regarding that allegation by the SEC.

    As for Henry Blodget’s role in pumping up internet stocks I stand by my claim that he played a role in that process. I was there – practicing law in Silicon Valley – and I witnessed the bubble first hand. Blodget is now barred from the securities industry because of his role.


  2. I appreciate that you are a law professor. However, you do not appear to be experienced in securities law, which requires a more thorough understanding of the interpretations of law in this field. You say: “[A]sk any rational investor if they would have wanted Paulson’s role (in numerous meetings during the preparation and selection process) revealed prior to their investment decision. I cannot imagine anyone saying they would not care.” Yes, investors would want to know this information, but the courts have repeatedly ruled on this subject that investors are not entitled to know all facts in every situation.

    Consider the rash of DOJ lawsuits against many of the largest pharmaceutical companies for making illegal kickbacks and paying bribes to push their drugs. When the drug companies made such illegal payments, the Medicaid reimbursements meant that those companies would not only be subject to extensive fines and penalties, but ALL revenues in connection with Medicaid reimbursements could be RECLAIMED by the Federal Government for violations of the False Claims Act. Now, you might think that the drug companies would be required to disclose that they were engaging in illegal acts that could have major adverse impact on the stock prices of those companies, right? Wrong! Although those omissions were material and nobody would dispute that investors would want to know that the companies they were investing in were making illegal payments, the courts have ruled that a company does not have to disclose that it is engaging in illegal acts! Thus, there are no civil lawsuits nor SEC lawsuits that have succeeded against the drug companies for these material omissions.

    Now, how could Goldman possibly be held responsible for some omission that isn’t even illegal. And if that were no enough, it would not have mattered in the slightest that John Paulson participated or not in the selection of the RMBSs in the subprime portfolio because ALL of them failed anyway. And if that still were not enough, ACA (the selector and investor) had SOLE ultimate responsibility for the selection of the portfolio. And if that still were not enough, John Paulson was not even considered a “player” at the time, so at the very best, this is a weak case of fraud-by-hindsight based on an immaterial omission of fact, which the courts have repeatedly ruled against. And if that STILL were not enough, Goldman even lost money on this ABACUS deal. So, let me sum up. There’s no crime, and there’s no fraud. Yes, there are winners and losers, but that is the certain outcome in the zero-sum game of synthetic CDOs–and all parties knew that, including ACA, with its team of sophisticated and credentialed mortgage security specialists. Please read up on the case law and you’ll understand what I’m talking about. Henry is right, and you are wrong. Sullivan and Cromwell could make mincemeat out of those lame SEC attorneys in this case; although I do believe that Goldman will likely settle to put this lawsuit behind them.

    And by the way, you are also wrong about Henry “causing” the Internet bubble. That is an absurd accusation. ( And no, I do not know Henry personally, but I’ve lived through and studied the history of the Internet bubble era.)

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