Academic

My first reaction to the SEC's Goldman case was skeptical, and it now appears that there are plenty of commentators who agree. I've since had a chance to look more closely at the complaint, and, while as complaints go, it is a model of brevity and clarity, I'm still unconvinced by the case.

• Much has been made of the fact that Paulson helped pick the securities in the instrument that he wanted to short.  I'm not sure that we'd want to start policing real estate brokers for getting tips on properties to sell from people interested in selling, and that doesn't seem too different to me than this.  Someone had to pick the assets referenced by the CDO, and requiring them to be a mirror of the state of the residential market is both silly and impossible.  And as the complaint itself notes, ACA (the manager of the debt obligation at issue in the case) was getting emails entitled "Paulson Portfolio" during their involvement in selecting collateral.
• Fraud of omission is always a troubling claim to make, but that's what the SEC's complaint relies on in large part.  Paulson's role "was not mentioned" to purchasers of the upside of the CDO.  Again, Paulson was hardly known for his brilliance when the transaction was designed, so I doubt it would have made a difference.  As for the number of things that could have been mentioned, but were not, when some big banks made long bets in favor of US residential mortgage market, the imagination runs riot.
• Most compelling, to me at least, is the fact that ACA may not have known that Paulson was short, when Goldman knew it.  This is because ACA kind of asked Goldman what Paulson was doing.  On P46 of the complaint, they sent an email to Goldman after meeting with Paulson saying "we didn't know exactly how they [Paulson] want to participate in the space.  Can you give us some feedback?"  That feedback is not, potentially, fraud by omission, it's fraud by commission.  Still, ACA knew Paulson's fingerprints were all over the deal. 
• And, of course, a fundamental problem for the SEC is the sophisticated nature of every party to the transaction.  The SEC often describes its mission as one of consumer protection.  But the consumers in this case didn't need to be protected.  They weren't even consumers, as you or I often think of that term.  They were traders.
• A final note on relief.  The prayer for relief is standard, but most banks can overcome fines and disgorgement - Goldman certainly can.  That prayer for a judgment "Permanently restraining and enjoining GS&Co and Tourre from violating section 17(a) of the Securities Act....Section 10(b) of the Exchange Act....and Exchange Act Rule 10b-5" is a bit like the yellow card of securities enforcement. Violate it again, and you could get red carded from the securities industry, let alone exposed to contempt of court orders, which are no laughing matter.