SEC v. Goldman Sachs & Co.

790 F. Supp. 2d 147 (S.D.N.Y. 2011)

 

RULE:

To state a claim under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.S. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, the SEC must allege a defendant: (1) made a material misrepresentation or a material omission as to which he had a duty to speak, or used a fraudulent device; (2) with scienter; (3) in connection with the purchase or sale of securities. Unlike a private plaintiff, the SEC need not allege or prove reliance, causation, or damages.

FACTS:

In early 2007, U.S.-based Goldman structured and marketed a synthetic collateralized debt obligation ("CDO"), ABACUS 2007-AC1 ("ABACUS"), that was tied to the performance of subprime residential mortgage-backed securities ("RMBS").  At the time, Tourre, worked as a Vice President in the structured product correlation trading desk at Goldman's headquarters. Goldman and Tourre knew, according to the SEC, that it would be hard to market and sell the liabilities of a synthetic CDO if they disclosed that a short investor (i.e., Paulson) played a significant role in selecting the portfolio. But Goldman and Tourre also knew. The SEC alleged, that identifying an experienced and independent third-party collateral manager as having selected the portfolio would facilitate placement of the CDO liabilities. SEC alleges Goldman's marketing materials for ABACUS were false and misleading because they failed to make any mention of Paulson's role in selecting the reference portfolio.

The second allegation of SEC stated that in late 2006, IKB, a German commercial bank, informed Goldman and Tourre it was no longer comfortable investing in the liabilities of CDOs that did not utilize a collateral manager—i.e., an independent third-party with knowledge and expertise in analyzing RMBS CDOs backed by U.S. mid-and-subprime mortgages. Goldman and Tourre knew, the SEC claims, IKB would likely accept ACA as a collateral manager. Between February and April 2007, Goldman allegedly sent IKB copies of the ABACUS term sheet, flip book, and offering memorandum. Because these materials referenced ACA but not Paulson, the SEC alleged these representations and omissions were materially false and misleading. ABACUS closed on or about April 26. IKB bought $50 million worth of Class A-1 notes and $100 million worth of Class A-2 notes, both at face value. Within months of the closing, the ABACUS notes IKB purchased were worthless. IKB allegedly lost almost all of its $150 million investment. IKB would not have invested in ABACUS, the SEC claims, if it knew Paulson played a significant role in selecting the portfolio while taking a short position against ABACUS.

Lastly, on or about April 26, the SEC alleges, ACA Capital Holdings, Inc. ("ACA Capital"), ACA's U.S.-based parent company, purchased $42 million worth of ABACUS Class A-2 notes at face value. Goldman offered and sold the ABACUS notes ACA Capital purchased, according to the SEC, and Tourre played a principal role in the offer and sale of these securities. Within months, the SEC claimed the notes were worthless. Moreover, ACA Capital, like ACA, was unaware Paulson was taking a short position on ABACUS, according to the SEC. The SEC alleges it is unlikely ACA Capital would have written protection on the super senior tranche if it knew Paulson was taking a short position. 

Thus, an Amended Complaint was made which charges Tourre with three counts of civil securities fraud.

ISSUE:

Based on the allegations of the SEC, should all three counts of civil securities fraud be granted?

ANSWER:

No.

CONCLUSION:

The first allegation involved two note purchases by IKB. Here, in view of the fact that none of the conduct or activities alleged by the SEC, including the closing, constitute  facts that demonstrate where any party to the IKB note purchases incurred irrevocable liability, the SEC fails to provide sufficient facts that allow the Court to draw the reasonable inference that the IKB note purchases or sales were made in the United States. The Court need not address the SEC's argument in view of the SEC's failure to allege that any party to the IKB note purchases incurred "'irrevocable liability'" in the United States because the SEC does not sufficiently allege the IKB note purchases were domestic transactions, the Court also makes no finding regarding whether trade confirmations are sufficient to establish the territorial location of a purchase or sale. Thus, the SEC fails to state a claim that Tourre violated Section 10(b) and Rule 10b-5 with respect to the alleged IKB securities transactions. Accordingly, the second and third counts are DISMISSED as to IKB.

The second alleged ABACUS securities transaction involvee ABN. Here, The SEC failed to allege the ABN CDS transaction constitutes a domestic transaction under Morrison for the same reasons as the IKB note purchases. Absent a purchase or sale made in the United States, Tourre's alleged marketing efforts are insufficient to make him liable under Section 10(b). In addition, because the SEC does not sufficiently allege that any party to the ABN CDS transaction incurred irrevocable liability in the United States, the Court makes no finding regarding any of the trade documents Tourre cites or the SEC's argument regarding liability through foreign agents. Thus, the second and third counts are DISMISSED as to ABN.

The last set of alleged ABACUS securities transactions involve the security-based swap agreement ACA Capital entered into that was sold by Goldman and the $42 million worth of ABACUS Class A-2 notes ACA Capital purchased from Goldman. The SEC's allegations regarding ACA do not pick up again until two and a half months later, on April 26, when ACA Capital purchased the ABACUS Class A-2 notes. Despite previously representing to ACA that Paulson would take a long equity stake, the SEC alleges neither Goldman nor Tourre informed ACA Capital that Paulson was taking a short position with respect to ABACUS.  If ACA Capital knew Paulson was taking a short position, the SEC claims, it is unlikely it would have written protection on the super senior tranche.

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