Today’s hot business news is the SEC’s civil suit against Goldman Sachs alleging securities fraud. I don’t know how the lawsuit will turn out, but the allegations are disturbing, to say the least. Essentially, the SEC alleges that a so-called “neutral third party” put together a package of mortgage-backed securities for Goldman Sachs, which Goldman Sachs then sold to investors. The problem? The third party wasn’t neutral at all, and Goldman Sachs allegedly knew it. In fact, the third party supposedly pieced together a package of mortgage-backed securities that he believed, by design, would inevitably fail. The “neutral third party” then shorted the entire package — and along with Goldman Sachs profited considerably in the deal.
In my practice, I advise clients on their disclosure of facts that are, or may be, material to their prospective investors’ investment decision. A failure to disclose a “material fact” is plainly unlawful under federal securities laws. Now, I ask you, if you were an investor buying this package from Goldman Sachs, would it have been material to your decision to know that the party who put the package together did so with the intention of shorting his own investment? It defies my imagination that anybody would believe such a scheme was ethical, much less legal. Our markets succeed based on investor trust (when was the last time you invested in a company listed on the Zagrab Sock Exchange?), and it is absolutely critical that the SEC takes action against anyone who abuses that trust — regardless of the size and stature of the firm and regardless of the very short-term consequence to broader market prices.