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Goldman Sachs Said to Have Been Warned of SEC Suit

Goldman Sachs Group Inc., which fell 13 percent yesterday after U.S. regulators announced fraud accusations, didn’t disclose that it was warned nine months ago that investigators wanted to bring a case, people with direct knowledge of the talks said.

Goldman Sachs responded to the so-called Wells notice from the Securities and Exchange Commission within months and met with the agency officials trying to fend off the civil lawsuit, said the people, who declined to be identified because the talks weren’t public. In March, the New York-based firm said it was cooperating with regulators’ “requests for information.”

“The question is whether a general disclaimer like that is rendered misleading because you left out the specifics,” said Adam Pritchard, a former SEC attorney who teaches law at the University of Michigan in Ann Arbor. “The prudent, conservative choice is to disclose more,” because omissions can lead to shareholder lawsuits, Pritchard said.

Lucas van Praag, a spokesman for Goldman Sachs in New York, declined to comment.

Goldman Sachs, the most profitable company in Wall Street history, created and sold collateralized debt obligations tied to subprime mortgages in 2007 without disclosing that hedge fund Paulson & Co. helped pick underlying securities and bet against the vehicles, the SEC said in its suit. The SEC sent the firm a Wells notice in July and the company responded in September, one of the people said.

Companies typically disclose legal issues such as regulatory probes in their quarterly and annual financial reports.

Annual Report

Goldman Sachs’s annual report for 2009, filed with the SEC in March, recycled a passage the company used in the previous year’s report to describe regulatory probes involving securities linked to subprime mortgages. In both cases, the firm wrote:

“GS&Co. and certain of its affiliates, together with other financial services firms, have received requests for information from various governmental agencies and self-regulatory organizations relating to subprime mortgages, and securitizations, collateralized debt obligations and synthetic products related to subprime mortgages. GS&Co. and its affiliates are cooperating with the requests.”

Goldman Sachs, which fell $23.57 to $160.70 in New York trading yesterday, might argue that it reasonably believed the SEC’s warning wasn’t material, Pritchard said. The firm could argue that it thought the regulator wouldn’t sue after Goldman Sachs presented its defenses, he said.

“The SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation,” Goldman Sachs said in a statement yesterday.


To contact the reporters on this story:
Joshua Gallu in Washington at 
jgallu@bloomberg.net;
David Scheer in New York at 
dscheer@bloomberg.net.

To contact the editor responsible for this story:
Alec McCabe at 
amccabe@bloomberg.net



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