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
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.
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