A split decision
Investors yesterday eased their assault on Goldman Sachs after it emerged the Securities and Exchange Commission isn’t unanimous in its decision to file fraud charges against the bank, thus raising questions about the strength of its case.
The SEC voted 3-2 to slap Goldman with charges that it withheld from investors information about hedge-fund king John Paulson’s involvement in creating a complex mortgage security that lost investors $1 billion.
The vote by the Wall Street watchdog’s five commissioners was along party lines, with SEC Chairman Mary Schapiro voting with her fellow Democrats, Luis Aguilar and Elisse Walter. Republican commissioners Troy Paredes and Kathleen Casey voted against the move.
“This says it was purely political,” said one hedge fund trader.
The case has been given to US District Judge Barbara Jones of the Southern District, who was appointed to the bench by President Bill Clinton in 1995. Judge Jones presided over the fed’s criminal fraud trial of WorldCom CEO, Bernie Ebbers.
Goldman’s stock — which got pummeled Friday, dropping 13 percent and wiping out more than $12 billion in investor value — made up some lost ground on news of the vote. Shares gained 1.6 percent to $163.32. In early trading, they had slipped as much as 3.6 percent.
Details of the vote came as Goldman again challenged the SEC’s claims. In a letter distributed yesterday to clients, the gold-plated firm said it “would never condone one of its employees misleading anyone, certainly not investors, counterparties or clients.”
The bank also refuted the government’s charges, saying, “the SEC does not contend that the two professional institutional investors involved did not know what they were buying, or that the securities included in this privately placed transaction were in anyway improper.”
The lack of unanimity also fueled further speculation that the agency could have a tough time winning its case.
Already, securities lawyers who have been mulling the case to decide whether to bring lawsuits against Goldman on behalf of investors say they’re torn about the strength of the SEC suit.
If Goldman execs “affirmatively misrepresented” Paulson’s role in the securities, “then they’re in big, big trouble,” said one securities lawyer who’s considering representing investors hurt in the case. But if they don’t prove that conclusively, it would be harder to hold them accountable, lawyers said.
The SEC declined to comment.
Goldman is accused of hiding from investors the fact that Paulson cherry-picked the collateral backing the transaction based on what he thought was most likely to fail.
Fabrice Tourre, a 31-year-old trader and the only Goldman executive named in the suit, has taken a leave of absence. The trader — who referred to himself in e-mails obtained by the SEC as “Fabulous Fab” — is “on paid leave with no end date,” said company spokesman Lucas Van Praag, who described the leave as “voluntary.”
Meanwhile, two Democratic congressmen also pushed the SEC to widen its probe to assess whether any Goldman mortgage securities backed by American International Group were fraudulently created.
