"It's a fact case. It's not a cutting-edge legal theory case," Drexel Law dean Roger J. Dennis tells me, of the Securities and Exchange Commission's civil fraud accusation against Goldman Sachs. The SEC says Goldman failed to warn a group of investors that it was selling them risky home-loan bonds selected by a short-seller who'd make money if the loans weren't paid. Case here, Goldman's denial of wrongdoing here.
Dennis adds: "The SEC is trying to make it a pretty straightforward conventional case, that you ought to accurately disclose conflicts of interest in your material docuemnts" to investors.
The SEC is not saying "anything systematic about the economic meltdown," even though the case does concern, at bottom, bad home loan bonds. "The essence is that Goldman was putting something together and lying about material fact."
Isn't it significant that the government is going after Goldman -- since the government usually goes after only small firms and rogue individuals, preferring to settle with Wall Street's powers? "To prove things beyond a reasonable doubt to a lay jury in a criminal case is a really high burden of proof," Dennis said. "The preponderance of evidence before a judge," in an SEC-style civil proceeding, "is a lot easier to do."
Dennis was a Justice Department trust-buster and a Skadden, Arps corporate lawyer before he went into the law-school business. "My perspective as a government prosecutor I wanted to look for the biggest fish in the lake to catch. If youre thinking about resource allocation and deterrence effect, the bigger, the better. The facts lead where the facts lead."
On the other hand, it's interesting, he said, that the SEC's board "broke 3-2 on bringing this case. That is a bit unusual. Everyone is speculating on what that means. I would think it means the two who voted against it would be, these were all sophisticated investors," and should have known better. Dennis, however, agrees with the majority: "You know you're going to get screwed by Goldman; but Goldman is telling you, 'We're not going to screw you more than average because this objective third party is going to select the portfolio.' That's an important representation to the institutional ivnestor who's buying the thing. These investments are incredibly opaque."
Goldman should have made it explicit what the investors were getting into, sophisticated or no, the SEC figures.