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Guest Post: The Mainstream Media Doesn’t Know Sh*t About Securities Law or the Goldman Case
Submitted by Damien Hoffman of Wall St. Cheat Sheet
Last week Barry Ritholtz had an excellent post 10 Things You Don’t Know (or were misinformed) About the GS Case
in which Barry noted that 99% of the mainstream media commentary
regarding the strength of the SEC’s case is, of course, completely
uninformed conjecture.
I sat down with Barry, who is a lawyer with experience in securities
law, to get an insightful take on the SEC’s case against Goldman Sachs
(GS):
Damien Hoffman: Barry, what annoys you most regarding the media’s commentary on the Goldman case?
Barry: The rule on securities fraud and misrepresentation is
straight forward. You cannot make material misrepresentations when
selling a security. You can’t say black when it’s white. You can’t say
up when it’s down. John Paulson can’t say he’s long 200 million when
he’s short 200 million. You just can’t and yet that’s what was done.
It doesn’t matter if Goldman lost money. So what? You can lose
money. If I rear-ended a guy with my car and banged up my fender, I
lose money. It has nothing to do with fault or guilt. State of mind on
all that other stuff is irrelevant. The question is whether Goldman is
guilty of committing some form of violation of these rules. It’s either
yes or no. It’s amazing people get it so very wrong.
Damien: Which people or publications got it very wrong?
Barry: There are a lot. But, for example, the New York Times got it
wrong when they talked about the loss. Market Watch got it wrong when
they talked about “Mens Rea” which is mental state. There are just a
few who got it wrong and misinformed the public.
You don’t have to be a specialist in this area. You just have to
understand that there’s certain specifics of securities rules and
litigation. If you are not familiar with that area, then, as I
mentioned, pour yourself a big glass of shut-the-fuck-up and sit
quietly in the corner.
At first, Jim Cramer, who’s usually smarter than this, lost his
objectivity and said, “Goldman lost $90 million, how can there be a
crime.” Are these people trying to put forth the legal standard that
anyone who losses money in a transaction cannot be guilty of fraud,
misrepresentation, or material omission? What the fuck are they talking
about?
Each jackass who comes out says something more mistaken than the
putz before him or her. It’s fascinating to watch. If it wasn’t so
serious and important, it would be funny. However, because it is
important, at a certain point you must to say, “All right, I had enough
of you idiots. Shut the fuck up and let’s talk about the facts of the
case.”
In a case where we have 7 million plaintiffs and a very complicated
medical issue, that’s a complex case. Did you or did you not
misrepresent security’s for sale? That’s not a complex case.
People keep saying, “Well, it’s political. It was voted three to
two.” That doesn’t mean this is a political case. That means this is a politicized
case. That’s a defense tactic. That’s something the defense raises.
When you say that blindly, you are helping one side or the other
without knowing it.
Say what you want, but try to be informed. Try not to just open your
mouth and say whatever stray thoughts come out regardless of the legal
accuracy of what you’re saying. It’s not against the law to be an
asshole. It’s not against law to be wrong. So, the media is just
parading people who are one or the other or both. If you’re interested
as an investor in knowing what’s really happening, you actually have to
understand the law and do some digging to find out what the truth is.
This guy Robert Khuzami,
who’s now head of SEC enforcement, this guy is the shit. If you read
his background, he’s a bad ass motherfucker. I don’t want to be
defending any case against him. This guy is taken apart terrorist
rings, the mob, and other security frauds. He’s won all sorts of awards
including awards. He has been in cases where they threatened his life
and Khuzami said, “Fuck you. I’m putting you on jail.” I made some
calls and verified his legal reputation. He’s meticulous. If he’s
saying Goldman did A, B and C, that’s just what he has to reveal on the
complaint. I’m fairly confident there is a laundry list of emails,
wiretaps, depositions, interrogatories and statements that are far, far
more significant than the tip of the iceberg we’ve heard so far.
Damien: This is a huge case, the implications of the
philosophy behind this case of Wall Street versus Main Street are so
intense that if the SEC were to bring a crappy, flimsy little case
against Goldman and get destroyed, it would be a massive embarrassment.
Barry: Right. The SEC doesn’t take a big case like this and go to
trial unless they’re pretty confident there is some form of a solid
case. And Goldman doesn’t defend something like this so vociferously
unless there’s bad shit behind it. Goldman is looking at this the same
evidence and saying, “Hey, we can’t give in on this because there’s a
ton of other stuff behind it.”
A significant amount of people are telling me, “You must be short
Goldman.” I said, “No, I have no position in Goldman.” If anything,
they trade down to the 140s and then the stock comes back. They’re
still a money minting machine — that’s the key. And this is just a
single case.
Damien: Well, Barry, thanks for your candid thoughts on this
case. I look forward to catching up with you next week about the
markets.
Barry: Sure thing, Damien. I look forward to it.
»
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Wow. BR might get some traffic at his site if he keeps talking like this.
I thought BR was mainstream
The Mainstream Media Doesn’t Know Sh*t About (Securities Law or the Goldman Case) AnythingFIFY.
Can the main stream media solve this?
Anagram puzzle?
SEC v. Land Scam Hogs
Hi Musak v. Elfin Bank
And this also using first names.
Bike Humor Tzar v. Fondly Bank Lie
Couldn't help myself.
SEC v. Goldman Sachs
Khuzami v. Blankfein
"I’m fairly confident there is a laundry list of emails, wiretaps, depositions, interrogatories and statements that are far, far more significant than the tip of the iceberg we’ve heard so far."
This is a point that's been lost in the smoke. The complaint doesn't need to lay out the entire case, just enough to show for legal (and political) reasons that there is some basis for a case. I don't really know if the SEC has a winnable case but they do have a case. I wonder what will come out in discovery? You can bet a few hard drives were dropped in the river along with some bodies.
Care to go pier fishing for servers?
I hope Khuzami is as much of a badass as Ritholtz alleges. We need desperately need a badass right here, right now.
BR is getting about 141k a day so he's doing all right.
Barry Ritholtz is an amazingly astute individual. He is always worth the read.
Fish Gone Bad - Real fish going to bad coming out of Louisiana, Missi & Alabama..
'Well I am certainly wiser than this man. It is only too likely that neither of us has any knowledge to boast of; but he thinks that he knows something which he does not know, whereas I am quite conscious of my ignorance. At any rate it seems that I am wiser than he is to this small extent, that I do not think that I know what I do not know.'
-Socrates
This is a partial repost.
Hey, I'm no friend of the banksters, and have about 1000 posts in support of that, but maybe Barry should save a little bit of STFU beverage..
On March 30th your humble blogger posted: 'Soon the debate will fall on the continuum of a double-dip caused by the counterproductive populism of bankster bashing versus the political palliative of misdirection through scapegoating.'
Cue Goldie Scoldie Show Trial puh-lease.
Heard about Ritholz's commentary on Goldie through Honest Abe in Barron's...
He makes 1 point, 'The claim Paulson & Co. were long $200 million dollars when they were actually short is a material misrepresentation — that’s Rule 10b-5, and its a no brainer. The rest is gravy.'
My understanding was that the equity tranche was not part of the final deal, so not sure what the point is. The reference to Paulson being long was conditional, in some initial memo. Yes? Was it in the final structure? Don't think so. That's damn weak stuff. Folks didn't read the final deal? Seriously?
The late great Mark Pittman once wryly noted that almost no one in the media knew what yield was. What do you think the odds are that these same folks have any clue as to how a structured offering is circled?
What other point does Ritholz make?
'What you don’t see are all the emails, depositions, interrogations, phone taps, etc. that the prosecutors know about and GS does not'. Uh.. well neither does Ritholz, so again, what is the point?
For folks that have never participated in a structured bond offering, who never saw the gurus whip up iterations on the back of napkins, who never witnessed slivers of equity being presented as burnt offerings to the rating agency Gods, the current pablum narrative would appear to be unassailable.
Now I wasn't privy to this deal getting circled but will hazard a guess as to what the equity tranche (Paulson going long in the intial) was all about...
Paulson was more than willing to put down a sliver of equity in order to secure the AAA, but once it was confirmed that the rating agencies would give the pixie dust lipstick without it, it went buh-bye...
The ratings agencies are the enemies of the people, the rest was 'enabled' noise.
The 'selection' process on almost any comparable structured product was a reverse engineering of the rating agencies 'models' that had been tinkered over time in collusion with their fee-paying clients for the end goal of getting the AAA on the selected pig.
Will Goldie be found greedy before guilty by an impartial jury? That first assumes you can get an impartial jury, but yeh sure why not? The whole system was guilty of this. This was the game.
However if every other bankster is not brought up on similar charges than this episode is nothing more than a political diversion, the political palliative of misdirection through scapegoating in order to quell the 'counterproductive' populism of bankster bashing.
The full post if anyone gives a rip ..
http://anonymousmonetarist.blogspot.com/2010/04/failborger-failborger-ch...
As probably the only progressive/liberal on the planet that is defending Goldie on this one suspect my blog readership has dwindled down to my Mom...
Even criminals deserve a fair trial ya know, rule of law, basis of democracy and all that blah blah blah....
AM
You left out the best part in your partial post here on ZH. Now I understand why.
"Dance recital for a young-un this morning so watching the baby until the sitter arrives...this disclosure for purposes of explaining why your humble blogger had Hee-Haw on without the sound muted."
I thought I'd picked up on some Hee-Haw references in a few of your past posts but you never want to falsely accuse a man of being a Hee-Haw fan unless you have proof. And then you go and out yourself?
Now I know why I love ya. A man can't be considered well rounded (at least in my book) unless he has a few seasons of Hee-Haw under the belt. Re-runs are acceptable but original viewing is Gold. I'm an original myself. Not bragging of course, just sayin' I have the bonafides to judge. :>)
CD,
Actually, when I reference Hee-Haw, I mean CNBC :)
Bubblevision for Bloomberg.
But did watch Hee-Haw when I was a young'un.
No shit! I can never believe a word you say ever again. :>)
My comment still stands because you had to be aware of Hee-Haw to make the reference and other things you've said along the way indicate you're older than my adult son. How did you find a young filly to shack up with you? On second thought, don't answer that.
BTW have you ever considered actually writing as a contributor here at ZH? You're pretty good you know.
Not my path friend, but appreciate the compliment.
Great posts guys. Great reading. Very insightful about the equity piece. They needed the 10% equity post-FIN 46 to keep the thing off everyone's balance sheet. Then they wrote the whole thing off and the debt was orphaned. Now back to the north 40...
Hope BR's perspective is accurate. This requires a HUGE cleanup, and reform with permanent teeth. That's why you have to have effective laws....not for what you think people will do, but for the 1,000 things that they will do that you have not thought of.
Well, BR has a point, misrepresentation of a material fact is the key issue that the GS case turns on. So what is the material misrepresention?
In a CDO, a derivative security, where there are investors on the long side and on the short short side of the transaction, the SEC is alleging that the name of an investor on the short side should have been disclosed.
I'm sure there are other allegations, but a big stink has been about this issue. Who is on one side or the other seems entirely academic, as John Paulson's name would've revealed no, muchless material, information in 2007.
When you create a two-way product where money invested on each side has to equal, and the outcome is unknown, it doesn't matter if it's Yankees v. Red Sox, or Yankees v. Orioles, it's the bid/offer price that will induce the indifferent to take one side or the other.
Emails that disclose that the Yankees v. Orioles is a shitty proposition doesn't change my approach--tell me something I don't already (or should've) know(n).
I look more at the PR aspect of it. GS is making money so as far as they are concerned, this is just a bump in the road. But I firmly believe , even if the court case is nothing more than a flat tire, seeing those young faces on TV who were pulling down more for selling crap in one year than a well paid professional make in a career and your basic $46,000 a year average worker makes with 10 of his best friends in a lifetime, if they aren't laid off, is more than enough .
I wouldn't be surprised if this was planned. Let a little steam off. But, I don't think people in DC and NY get out enough. There was a shit load of local coverage all over the country. This was not your average , "I'm not watching a Senate hearing cause American Idol is on" .
They got to see the Vampire squids in person. Would any of you buy a car from them? That's how people look at them. If they lose the case and go out of business , that's one thing. But if they win, people will look at each other and other and say :"they legalized stealing my house and they got rich off of it too. I had 8 more years to pay it off"
They saw a Bald short guy, and a bunch of well dressed young people saying "yeah, we fucked em, so what? We didn't break any rules. WTF, that's how we make our money. Ya know? . You play you pay. They were trying to act serious but you could see they weren't worried at all. They looked wealthy , successful and people are asking "what do they do again? Are they Lawyers? Nah, they are just like dickhead down the street at Paulies buy-here-pay-here trying to sell that piece of shit off the lot that falls apart 30 seconds or thirty feet whichever comes first. Then you have to pay on it for 10 years every week." "Yeah but he doesn't make much. How much did you say these guys made. I don't know, I got some email right here. Lets see,holy shit, you ain't gonna believe it."
That was as powerful a PR message as I ever have seen. People who have been unemployed for two years or are just now losing their jobs and their houses will be staring at that picture. Maybe not from TV. But think of all the you tube clips that are being made right now.
You can't watch American Idol when your house is gone and your cable has been turned off. So lets let this simmer a bit. Barry may be right, he may be wrong. I don't think it makes any difference. Someone is going to see opportunity in this simmering rage. Look at Dumbizona. All it takes is one turn on the stove to the right to make it go on high boil. Why do you think the GOP was called off the filibuster. Someone is watching. They can't allow those people to be seen defending these guys.
Maybe it's wishful thinking, but at some point, people just break. Those homes represented a lot to people. It really wasn't the 401ks , although I don't want to say they were nothing. But we old fucks were always taught, buy a house. Don't borrow off of it. You got nothing to worry about when it's time to quit work. You sell the house and you move to a small place, take you social security and your set. These fucks not only killed the American dream. They shredded the security blanket too. People are realizing that 500 Grand or even a million dollars they were hoping they would have at 65 for working 40 years at a shit job? They may lose all of it because they can't make the payments with no job. Even those that figure "ahh real-estate will come back, it always does."
It can't come back for you if you don't own any. But those guys, who don't make anything that's worth anything, they don't do anything for the economy, hell they don't even pay taxes, just stole their security blanket with a "Fuck you, we didn't do anything wrong"
The face of the Vampire squid was all over the place. It won't go away. We all know the Fed is pushing on a string desperately trying to get the people who still have houses to stay in them by pushing up the value . You just can't do that with 300,000 of them foreclosing a month and the unemployment rate in the middle class at around 30%.
We'll see though. Maybe they'll drug the water.
Nice. He's right. The law is slow, but when it hits.... boom. The market doesn't quite understand this concept. They think it's a blow-by-blow news cycle fight. What Khuzami was doing at 3:00 PM five months ago was slowly leading to this reality almost with certainty, if you knew the practices in the CDO market. Irony is, bankers could have predicted this best. The next thing people should understand.... prosecutors and civil SEC investigators float lots of facts to the surface. Then, victims and their lawyers move in for phase two. Again, slow but sure. If I were a bank investor, I'd want to know my exposure. I'd have my own lawyers profile all my own past deals in order of which are most susceptible in civil litigation, on down. All the big sellers are probably also eying the big buyers right now and feeling all the levers out.
He never mentions that guy actually running the case is the same guy who brought down Crazy Eddie Antar. He is a career SEC pit bull who has nothing else he wants to do in life but bring down Wall Street sleaze balls.
I pointed out BR's post a few days abck when there were idiots posting about "there's no case here." BR's points are succinct and to the point: there is a case, and it's a doozy. Now, when do the other banks gets sued for their own CDO 10b-5 lapses.
Jury selection should be interesting
Maybe we can slip Ripped Chunk into the jury selection pool. He could wear a ZH tee and a tie. :>)
Barry Ritholz is the anti-Cramer.
Washington Post
The Securities and Exchange Commission has referred the ongoing investigation of Goldman Sachs to the Justice Department for possible criminal prosecution, according to a source familiar with the matter.
But any Justice Department investigation that may be ongoing had yet to enter a formal stage, as key officials involved in the Goldman case had not been interviewed by federal prosecutors or FBI agents, according to another source familiar with the matter.
WSJ
Federal prosecutors are conducting a criminal investigation into whether Goldman Sachs Group Inc. or its employees committed securities fraud in connection with its mortgage trading, people familiar with the probe say.
The investigation from the Manhattan U.S. Attorney's Office, which is at a preliminary stage, stemmed from a referral from the Securities and Exchange Commission, these people say. The SEC recently filed civil securities-fraud charges against the big Wall Street firm and a trader in its mortgage group. Goldman and the trader say they have done nothing wrong and are fighting the civil charges.
So how come the rating agency involved isn't being held to account. (I am assuming the CDS tranches Paulson bought "protection" for were AAA-rated)
So how come the rating agency involved isn't being held to account. (I am assuming the CDS tranches Paulson bought "protection" for were AAA-rated)
"The rule on securities fraud and misrepresentation is straight forward. You cannot make material misrepresentations when selling a security."
Eh, I hate the Squid but it sounds shaky that GS made material misrepresentations in this case. I am assuming that the buyers had the full documentation on the mortgages they were buying. So if they were too lazy to read/too dumb to understand the prospectus, why is that Goldman's fault?
Simply because a famous short-seller was on the other end has no bearing... when I buy a stock I don't ask my broker the name of who is selling it to me first. There seems to be the implication that Paulson was such a genius, that no one would have knowingly wagered against him. I doubt it.
About the only way the SEC has a case if if they have iron-clad proof that the Fab or someone at Goldman told ACA directly that Paulson was also a long investor in the deal. That is really the only misrepresentation that has been mentioned. The rest is nothing more than selling something you think is crap to a dumb buyer, which may be distasteful but is not illegal.
Anagram puzzle?
SEC v. Land Scam Hogs
Hi Musak v. Elfin Bank
First one that solves this wins my respect.
Easy actually if you read the article
More variations using also first names;
SEC v. Mss-Clad-Hogan / Slam-Dong-Cash / Sad-Long-Chasm
Bike Humor Tzar v. Fondly Bank Lie
TAKING THE GLOVES OFF:
http://williambanzai7.blogspot.com/2010/04/taking-gloves-off.html
Previously mentioned EURO buying support has returned...
MARKET UPDATES:
http://www.zerohedge.com/forum/latest-market-outlook-0
Beautiful to hear thoughts from the hart, with logic.
The mainstream media doesn't know SH*T about ANYTHING!