Madam, – The Editorial (April 21st) on the US Securities and Exchange Commission (SEC) civil action against Goldman Sachs leaves many relevant facts of the case untold.
At its heart, this case is based on a single transaction in 2007 involving three professional investors. Two of them, ACA Capital Management and IKB (a German bank), took the view at the time that the mortgage securities market would rise and one, Paulson Co (a US investor), believed it would fall. This was a private transaction, limited to these three firms.
Goldman Sachs acted as an intermediary to enable each investor to position itself around an agreed investment portfolio. This portfolio was selected by ACA (which had an established record as a manager of such portfolios) from suggestions made by all three investors. Each investor believed their approach would make them money. To complete the transaction, Goldman Sachs, like ACA and IKB, had “long” exposure to the deal.
In the event, the market fell and ACA, IKB and Goldman Sachs lost money. Paulson, on the “short” side, made a profit.
In summary, the issue is one of disclosure. The SEC’s complaint, in part, accuses Goldman Sachs of not disclosing to one party the identity of the party on the other side of the transaction.
However, as is normal business practice, an intermediary between two professional investors taking opposite sides of a transaction does not disclose the identity of a buyer to a seller, and vice versa, for reasons of client confidentiality. Importantly, Goldman Sachs never represented to ACA that Paulson was to be a long investor, as the SEC’s complaint suggests.
Goldman Sachs would never condone an employee misleading anyone, whether they were an investor, counterparty or client. We take our responsibilities as a financial intermediary very seriously and do our utmost to ensure that integrity is at the heart of everything we do.
We do not dispute the importance of the SEC’s role in protecting investors and supporting fair and efficient markets. In this case, our dispute is with regard to the facts and the applicable law. – Yours, etc,