Legal Briefing: Probing the Strength of Goldman Sachs's Fraud Defense

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legal briefing

A daily look at legal news and the business of law:

Goldman Sachs Throws VP Fabrice Tourre Under the Bus

In my first look at the Securities and Exchange Commission's case, I noted that one of Goldman's (GS) best defenses may be asserting Vice-President Fabrice Tourre essentially went rogue. In my second look, I emphasized how crucial the charge that Goldman misled ACA Capital Management was and recounted the SEC's Tourre-focused evidence of deception.

Now it seems Goldman is already trying to say: 'We didn't deceive ACA, and we deplore anyone deceiving ACA. If Tourre deceived ACA -- though we think he didn't -- shame on him, it had nothing to do with us.'

Or at least that seems to be the message of this Bloomberg story, which notes:

The SEC complaint "clearly revolves a little bit around 'he said-she said,' " [Goldman's co-general counsel Greg] Palm said, and hinges on whether Tourre misled ACA into believing that [hedge fund] Paulson was investing in the deal instead of betting against it.

The story adds:

"It's all going to be a factual dispute about what he remembers and what the other folks remember on the other side," [Palm], said in a call with reporters yesterday, without naming Tourre. "If we had evidence that someone here was trying to mislead someone, that's not something we'd condone at all and we'd be the first one to take action."

But if Paulson's employee really did tell ACA that the hedge fund was going short on the deal, maybe whatever Tourre said won't matter.

Goldman's Commonsense $90 Million Loss Defense Not So Simple

In my second story on the case, I noted that one of Goldman's defenses is a pure appeal to common sense: Look, we only made $15 million from Paulson, and we lost $90 million by investing on the same side of the deal as ACA and IKB (a large German bank) -- how could we have been setting up their side to fail and then take their side of it? I noted that reporting has shown Goldman was making money in a variety of ways on these deals, and there was no way to be sure the $90 million/$75 million net loss was a complete accounting of the money flows.

Today The New York Times gives more reason to question the claim. Apparently, when setting up the deal, Tourre expected ACA to purchase the piece Goldman "invested" in, meaning Goldman was inadvertently stuck with it. Moreover, Tourre apparently worked hard to offload it but couldn't find any takers. And, the Times confirms, Goldman offset its losses with counterbets.

How Come ACA Didn't Notice Paulson's Deck Stacking? Hiding Lemons in Plain Sight

Erik Gerding, at the Conglomerate Blog, posts and discusses a technical paper showing that in synthetic collateralized debt obligations (CDOs), it's possible to "hide a lemon in plain sight," meaning it may not have been possible for ACA or any other investor to detect the alleged stacking of the deck by Paulson and Goldman.

For such hiding to be successful, however, the deck stacker must have not only the ability to pick the collateral, but also to structure the deal. Paulson claims it didn't structure the deal. If that's true, unless Goldman structured it with an eye to helping Paulson hide the lemons, it's not clear the paper fully answers the "we disclosed everything about the underlying mortgage securities, and that's all we needed to disclose" defense.

Dow Jones Files 'Hot News' Claim

A few days ago, I profiled a Hot News case of the big banks vs. and discussed the "misappropriation of Hot News" tort, which is basically a claim of stolen copyrighted material that conflicts with the First Amendment. Plaintiffs sue when they believe information they spent considerable resources to gather is being disseminated by, and profited from, third parties who had nothing to do with obtaining the information.

While the Associated Press has been both the tort's architect and perhaps most vigorous litigant, it's not the only news organization worried about protecting its reporting. Dow Jones (NWS) just sued because Briefing was posting verbatim on its site excerpts and headlines from Dow Jones newswire stories so fast The Wall Street Journal hadn't even posted them yet.

And in the Business of Law...

More women are being made partners at law firms, but it's not clear if they're true "equity" partners or not. Women across all industries make $0.77 to every $1 of equivalent work by men, but in the legal profession they do better than that -- even better than their MBA colleagues -- at least initially. With time, female MBAs do better.