Monday, April 19, 2010

Was Goldman's SEC "Fraud" Similar To JP Morgan Chase's 2008 "Aborted" Bearish Note Offering?

Consider the SEC's press release -- on what, it says, Goldman, Sachs & Co. did -- that crossed the line:

. . . ."The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, Director of the Division of Enforcement. "Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party. . . ."

The SEC alleges that one of the world's largest hedge funds, Paulson & Co., paid Goldman Sachs to structure a transaction in which Paulson & Co. could take short positions against mortgage securities chosen by Paulson & Co. based on a belief that the securities would experience credit events. . . .

That, above, is eerily similar to this June 2008 "bearish" note offering (abandoned prior to pricing -- see image at left; click to enlarge), speculating on declines in then Schering-Plough's common stock price.

Within nine days of abandoning the bearish proposed offering's position, JP Morgan Chase published a very favorable (bullish) research report on legacy Schering-Plough's prospects. It may well turn out that the only significant difference between Goldman, Sachs' current predicament and JP Morgan Chase's lack of one, is that it didn't actually go forward with that Schering-Plough offering. Fascinating.

There may be many more of these, sitting silently, in the shadows of Wall and Broad. Un-, or under-disclosed conflicts in public, and private offerings may be the new "black" on the Spring 2010 runway -- at 450 Fifth Street, NW, in DC.

Here's some video on the June 2008 deal:

Stay tuned. There will, as ever, be more to come.

1 comment:

Pharma Conduct Guy said...

Goldman-Sachs serves to illustrate why strict regulation is needed in order for a true free market to exist. So long as we have a system where a relatively small number of firms can manipulate, the problem will not go away. Goldman-Sach's actions in this case represent the largest redistribution of wealth in the history of the world.