In taking on Goldman Sachs, the most successful and prestigious investment bank on Wall Street, and accusing it of securities fraud, the Securities and Exchange Commission has its work cut out.

Goldman’s reaction – to deny the charge and stand firmly behind Fabrice Tourre, a vice-president who worked on the deal under investigation – reflects its confidence that the bank will be cleared in court. The SEC certainly does not have an open and shut case against it.

The most damning aspect of the SEC’s case relates to what was not said in the offer documents about the synthetic collateralised debt obligation in which IKB, a German bank, invested. Anyone reading these papers alone would have no way of knowing the involvement of John Paulson’s hedge fund.

Paulson & Co is not mentioned specifically and there is no reference to ACA – the “portfolio agent” that selected the reference securities for the deal on behalf of Goldman – having a back-and-forth debate over which bonds would be chosen with any short-side investor.

The SEC also alleges that Mr Tourre implied to ACA that Paulson would be taking a long position in the deal by buying the riskiest “equity tranche” of the CDO. The tranche was never actually sold – a point made explicit in the final offering document.

In practice, Paulson had come up with the idea for the trade, knowing that it hoped to short subprime mortgages it thought were about to fail, and then paid Goldman $15m to structure and market a deal.

Goldman’s defence is that everyone in the market knew that portfolio agents would be lobbied both by long and short sides, and that ACA had the final say. One difficulty with this is that “everyone should have known that” might not sound good to a jury.

But the evidence that Goldman and Mr Tourre actively misled IKB about the transaction, as opposed to not disclosing everything, is patchy. There is no “smoking gun” e-mail establishing that Mr Tourre thought the securities were flawed.

In one e-mail to a friend, he called a meeting with ACA and Paulson “surreal”. In another he talked of the “fabulous Fab standing in the middle of all these complex highly-leveraged exotic trades”, describing some synthetic CDOs as “monstruosities”.

This kind of generalised boasting is less damning than, for example, the e-mail Henry Blodget sent as an analyst at Merrill Lynch in 2000, describing one company he was recommending to investors as a “piece of shit”. He was later barred from the securities industry.

Furthermore, the fact that someone was going short on the securities that IKB was investing in, whether it was Goldman itself or another investor, could hardly have been a surprise to IKB because it was in the nature of the transaction.

By investing, IKB was in effect selling credit protection on the underlying securities – receiving regular cash payments in return for the risk of having to pay out if the underlying bonds defaulted. It had to know there was another party taking an opposite, short position.

That investor was Paulson but both Goldman and ACA made investments alongside IKB that lost money. Goldman lost a net $90m after taking account of its $15m fee, while IKB lost about $150m on its direct investment, and got into severe financial difficulties as a result of this deal and others.

This is the biggest stumbling block to the SEC case – if both Goldman and ACA knew they were constructing securities that were likely to fail and then mis-sold them to IKB, why did they invest alongside it?

None of this may make a lot of difference in the court of public opinion, or to the political impetus to clean up the over-the-counter derivatives market into which Wall Street crowded during the boom. Even if what Goldman did was legal, it is difficult to explain after the fact.

Existing securities rules may not have required the bank to detail Paulson’s involvement, nor the fact that it was receiving a large fee from an unnamed party. It seems unlikely that, in future, the rules will allow investment banks such leeway.

But whether Goldman is guilty of securities fraud is another matter. The SEC rocked Goldman and its investors with its charges, but that was only the first round of the fight.

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