O.K., So The SEC Sued Goldman Sachs - Now What?

O.K., So The SEC Sued Goldman Sachs - Now What?

The SEC's blockbuster announcement last Friday of its civil enforcement action against Goldman Sachs and one of its investment bankers rocked the securities markets and made headlines in the financial press around the world. Undoubtedly because of Goldman's prominence and perhaps also because of the nature of the allegations, the SEC's action is widely seen as a watershed event.

Beyond the implications for Goldman itself, however, the development may be even more significant for what it may portend about possible future actions and claims, both by the SEC and by aggrieved investors. Here are some questions about what may be coming next.

Can We Expect Further SEC Enforcement Actions Involving Subprime-Related Financial Instruments?

According a March 29, 2010 CNBC interview with SEC Chairman Mary Shapiro, the agency has been working since the subprime meltdown emerged to build up staff with the right skill and experience to pursue financial-crisis related cases. Now that the SEC has staffed up, she advised, we can expect to see more crisis-related enforcement actions. She said, with reference to these actions, "there are more in the pipeline."

Indeed, in its April 16, 2010 Litigation Release related to the Goldman Sachs action, the SEC specifically said that its "investigation is continuing into the practices of investment banks and others that purchased and securitized pools of subprime mortgages and the resecuritized CDO market with a focus on products structured and marketed in late 2006 and early 2007 as the U.S. housing market was beginning to show signs of distress."

There has already been extensive press coverage raising questions some other transactions that may be under scrutiny. Gretchen Morgenson's December 23, 2009 New York Times article raising questions about many of these transactions, including in particular the so-called Abacus transaction that is at the heart of the SEC's action against Goldman, refers to numerous other transactions at Goldman and elsewhere where, as in the Abacus transaction, the investment banks created investment securities that were structured so that the banks and others could profit on financial bets that the investments would lose money.

There have also been a number of press articles (example) about Illinois-based hedge fund Magnetar, which sponsored over 30 CDO transactions in late 2006 and early 2007, which the hedge fund itself shorted, allowing it to make significant profits when the underlying mortgages began to default.

Read O.K., So The SEC Sued Goldman Sachs - Now What? in its entirety at D&O Diary, a blog by Kevin LaCroix.

See also: High Stakes for the SEC, Goldman and Investors by Tom Gorman of SEC Actions