SEC Case Against Goldman Not Cut-And-Dried

Apr 20 2010 | 1:21pm ET

The Securities and Exchange Commission’s fraud case against Goldman Sachs could be one of a kind, and could prove awfully hard to win.

While some have called the SEC’s accusations against the Wall Street giant the tip of the iceberg, it could prove to be the whole iceberg, Reuters reports. The case alleges that Paulson & Co.’s role in the collateralized debt obligation at the heart of the SEC charges makes that CDO unusual, while Goldman claims it was business as usual.

Certainly, there was disagreement at the highest levels of the SEC as to whether Goldman did anything wrong. The regulator’s two Republican commissioners voted against pursuing the case after a long debate on Wednesday. But the three Democrats on the Commission, including Chairman Mary Schapiro, voted to move the matter forward.

Goldman has said the charges are “completely unfounded.” And, indeed, the whole case may depend on how one defines the word “selected.”

The SEC says Paulson, which is not accused of any wrongdoing, played a major role in picking the residential mortgage-backed securities that went into the CDO, which it then shorted, to great effect. Goldman says the portfolio was vetted and chosen by ACA Management, the CDO’s largest investor.

The SEC says ACA rejected 68 of the 123 RMBS that Paulson wanted included. Goldman says that proves ACA’s independence in the matter, and that Paulson’s role wasn’t material.

To further that case, Goldman has hired Gregory Craig, the former White House counsel to President Barack Obama, to represent it. Craig now works at the giant law firm Skadden Arps Slate Meagher & Flom.

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