Goldman & the SEC: living a material world

The SEC’s case against Goldman hinges on a single question: was it “material” information that John Paulson both 1.) played a role in selecting the mortgages which made up the Abacus CDO and 2.) took a short position on Abacus?

(In securities law, materiality of a fact depends on whether it is “so relevant or essential that a potential buyer would want to consider it before making a decision.”)

The Wall Street Journal rounds up an interesting balance of expert opinion on whether Paulson’s role was material and thus triggered a duty on the part of Goldman to disclose it.

On the “YES” side:

Duke Law professor James Cox:

“[Goldman’s representation that ACA selected the mortgages] strikes me as plain and simple laundering of the deal … To me, it goes directly to the materiality of the omission.”

Temple Law professor Peter Huang:

“If you were buying something, you should care about the fact that the person who was picking the things you were buying was actually betting against them … That’s the part that wasn't disclosed.”

Fordham Law’s James Cohen:

“Fundamentally you have a duty which arises out of a conflict and the conflict is what makes it smell … You see Goldman on too many sides of this transaction.”

On the “NO” side:

Wayne State’s Peter Henning:

“This isn’t mom and pop getting taken advantage of … [These clients] might not have known about Paulson, but they had to have known that these securities were extremely risky. To say these products were toxic waste is an insult to toxic waste.”

Matthew Farley, a securities lawyer at Drinker Biddle

“In these types of transactions, the buyer rarely knows who the seller is …The buyers weren’t privy to Paulson’s point of view, but so what? Does that fact relieve the buyer from performing its own analysis?”

-posted by brian