Legal Commentary

What Is Fraud?

By Big Tent Democrat

Commenting on the now widely covered SEC civil charge against Goldman (here is the complaint (PDF), Matt Yglesias writes:

The general form of this complaint, that it was wrong for Goldman to make money by betting on the failure of debt-vehicles that in another context Goldman was marketing, has been around for a while. But it’s never been clear to me if there was evidence of actual deliberate fraud, as opposed to something vaguer like an undisclosed conflict of interest.

(Emphasis supplied.) To non-lawyers, non-disclosure of a material fact may not seem like fraud, but under securities laws, it is fraud:

"Rule 10b-5: Employment of Manipulative and Deceptive Practices":

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security."

I do not know the story behind the Goldman case in detail, but what Yglesias described is a classic "omission of material fact" case which makes up the bulk of securities fraud cases.

Full post as published by TalkLeft on April 16, 2010 (boomark / email).