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10 things to know about the Goldman case

Do you think the SEC's case against Goldman Sachs is weak? Perhaps you were misinformed by the media. Here are 10 things you should know.
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I have been watching with a mixture of awe and dismay some of the really bad analysis, sloppy reporting, and just unsupported commentary about the Goldman Sachs case.

I put together this list based on what I know as a lawyer, a market observer, a quant and someone with contacts within the SEC. (Note: This represents my opinions, and no one else's.)

Here are 10 things you don't know, or were misinformed by the media, about the Goldman case.

1. This is a weak case. Actually, no — its a very strong case. Based upon what is in the SEC complaint, parts of the case are a slam dunk. The claim Paulson & Co. were long $200 million dollars when they were actually short is a material misrepresentation — that’s Rule 10b-5, and its a no-brainer. The rest is gravy.

2. Robert Khuzami is a bad-ass, no-nonsense, thorough, award-winning prosecutor. This guy is the real deal — he busted terrorist rings, broke up the mob, took down security frauds. He is now the director of SEC enforcement. He is fearless, and was awarded the Attorney General’s Exceptional Service Award (1996), for “extraordinary courage and voluntary risk of life in performing an act resulting in direct benefits to the Department of Justice or the nation.”

When you prosecute mass murderers who use guns and bombs and threaten your life, and you kick their asses anyway, you ain’t afraid of a group of billionaire bankers and their spreadsheets. My advice to anyone on Wall Street in his crosshairs: If you are indicted in a case by Khuzami, do yourself a big favor, and settle.

3. Goldman lost $90 million, hence, they are innocent. This is a civil, not a criminal case. Hence, any mens rea — guilty mind — does not matter. Did they or did they not violate the letter of the law? That is all that matters, regardless of what they were thinking — or their P&L.

4. ACA is a victim in this case. Not exactly; they were an active participant in ratings gaming. Look at the back and forth between Paulson’s selection and ACA's management. Fifty-five items in the synthetic CDO were added and removed. Why?

What ACA was doing was gaming the ratings agencies for their investment grade, Triple-A ratings approval. Their expertise (if you can call it that) was knowing exactly how much junk they could include in the CDO to raise yield, yet still get investment grade from Moody’s or S&P. They are hardly an innocent party in this.

5. This was only one incident. The market sure as hell doesn’t think so — it whacked 15 percent off Goldman’s market cap. The aggressive SEC posture, the huge reaction from Goldie, and the short-term market verdict all suggest there is more coming.

If it were only this one case, and there was nothing else worrisome behind it, Goldman would have written a check and quietly settled this. Their reaction (some say overreaction) belies that theory. I suspect this is a tip of the iceberg, with lots more problematic synthetics behind it.

And not just at Goldman Sachs. I suspect the kids over at Deutsche Bank, Merrill and Morgan are working furiously to review their various CDO deals.

6. The timing of this case is suspect. More coincidental, really. The Wells notice (notification from the SEC they intend to recommend enforcement) was over eight months ago. The White House is not involved in the timing of the suit itself, it is a lower-level staff decision.

7. This is a complex case. Again, no. Parts of it are a little more sophisticated than others, but this is a simple case of fraud/misrepresentation. The most difficult part of this case is likely to turn on what is a “material omission.” Paulson’s role in selecting mortgages may or may not be material — that is an issue of fact for a jury to determine. But complex? Not even close.

8. The case looks thin. What we see in the complaint is the bare minimum the prosecutor has to reveal to make their case. What you don’t see are all the e-mails, depositions, interrogations, phone taps, etc. that the prosecutors know about and Goldman Sachs does not. During the litigation discovery process, this material slowly gets turned over (some is held back if there are other pending investigations into Goldman Sachs).

Going back to who the prosecutor in this case is: His legal reputation is he is very thorough, very precise, meticulous litigator. If he decided to recommend bringing a case against the biggest, baddest investment house on Wall Street bank, he certainly has a major arsenal of additional evidence you don’t know about. Yet.

Typically, at a certain point the lawyers will tell their client that the evidence is overwhelming and advise settling. That is around six to 12 months after the suit has begun.

9. This case is political. I keep hearing that phrase, due to the SEC party vote. It is incorrect. What that means is the case is not political, it means it has been politicized as a defense tactic. There is a huge difference between the two.

10. I’m not a lawyer, but . . . Then you should not be ignorantly commenting on securities litigation.

I have $1,000 against any and all comers that GS does not win — they settle or lose in court. Any takers? My money is already in escrow — waiting for yours to join it. Winnings go to the charity of the winner's choice.

Barry Ritholtz is the author of "Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy." His blog is .