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.