Exposing Goldman Would Collapse Wall Street

[Policing Wall Street]

Why didn’t the Securities and Exchange Commission initiate a civil case againstGoldman Sachs for dumping the toxic Collateralized Mortgage Obligation, Hudson Mezzanine Funding 2006? Because the SEC did not want to hurt Goldman financially.

The SEC does not protect the public interest.

The SEC could have used the same law, Securities Act Section 17(a) [15 USCS Section 77q], which the SEC used to sue Goldman civilly for misrepresentations in the ABACUS 2007-ACA1 fraud.

The relevant part of Section 17(a) reads:“It shall be unlawful for any person in the offer or sale of any securities or any
security-based swap agreement…

(2) to obtain money or property by means of any untrue statement of a material factor any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading;”

Mezzanine financing is the lowest rated debt of a company, or residential mortgage security; it is the last debt to be paid.

Hudson Mezzanine was an artificial construct- it was created to follow BBB residential rate rated mortgages, which Goldman selected and knew would collapse in value.

But Goldman did not state that in the prospectus for Hudson Mezzanine Funding. Au contraire. The prospectus for Hudson reads: “Goldman Sachs has aligned incentives with the Hudson program by investing in a portion of equity and playing the ongoing role of Liquidation Agent.” (Exhibit 87 of Permanent Subcommittee on Investigations)

But Goldman didn’t invest in Hudson Mezzanine Financing. How do we know that?

Senator Carl Levin, Chairman of the Senate Permanent Subcommittee on Investigations, held hearings on Goldman’s perfidy; and Senator Levin released e-mails, which proved that Goldman’s interests were not aligned with the interests of its clients, who
purchased the Hudson Mezzanine CDO.

Here is an excerpt from an e-mail from Peter L Ostrem, dated Tuesday, September 19, 2006. “We’ve been asked to do a CDO of $2bln for the ABS desk….Obviously important to overall SP floor and Sobel and Sparks are focused on this happening…” This is the initial e-mail to set up the Hudson CDO.

Now remember “Goldman has aligned incentives…”

Well, here is an e-mail from Ostrem, which is dated Monday, October 30, 2006. And what did it state as its subject: “Great Job on Hudson Mezz”

And the body of the e-mail read: “Wednesday of last week we priced Hudson Mezzanine SP CDO, a static $2.0 billion structured product CDO backed by $1.2 billion of the ABX index and $800 million of other RMBS (Residential Backed Mortgage Securities) subprime securities. Goldman was the sole buyer of protection on the entire $2.0 billion of assets.”

Further on: “Goldman is currently mandated on $40+ billion of additional CDOs and CLOs for the next 12 months. Increasing velocity on debt and equity placement of our upcoming transactions will be the key to our success in 2007. Let’s do it
again.”

So Goldman planned to dump more than $40 billion of toxic securities in the next 12 months.

The SEC collected a civil penalty of $535 million from Goldman for selling Abacus 2007-AC1. The SEC used Section 17(a) of the Securities Act of 1933 [15.U.S.C. Section 77q(a).

So why did not the SEC charge Goldman with violating Section 17(a)? Because the SEC did not wish to harm Goldman. And one reason could be that the SEC hired Arthur Levitt, former Chairman of the SEC --who did nothing to punish narcotics smuggling, money laundering, and even rapes, at the American Stock Exchange, as I discussed in a previous column --as an advisor.

Charging Goldman with violating Section 17(a) would have been a slam dunk- a $2 billion slam dunk.

So let us examine the legal precedents for initiating a civil action against Goldman for violating Section 17(a).

The Court held in United States v Brown, (1977) 555 F2d 336: “In using broad language employed in Section 17(a) of Securities Act (15 U.S.C. Section 77q(a)), Congress was intent upon protecting integrity of market place in which securities are traded.”

And in SEC v M. A. Lundy Associates, (1973) 362 FSupp 226, the Court ruled: “General anti-fraud provisions of 15 USCS Section 77q(a), 15 USCS Section 78j(b), and SEC Rule 10b-5 are designed to protect the public from deceitful or misleading
statements or omissions in connection with purchase or sale of securities.”

In Lerman v Tenney, (1969) 295 FSUPP 780, the Court ruled: “Under Section 17(a) of the Securities Act, means through which false and misleading statements are published, or through which material facts omitted should have been published, are unimportant, and liability may attach where such statements or omissions occur in prospectuses.”

As for misrepresentations, we can examine several court decisions.

“Provisions of 15 USCS Section 77q forbid half-truths in interstate sale of securities; half-truth which amounts to deceit is fraudulent statement.” Coplin v United States, (1937) 88F2d 652.

“Present trend is that anti-fraud provisions of Securities Act Section 17 and Securities Exchange Act Section 10b and SEC Rule 10b-5, apply to negligent as well as intentional representations.” Corey v Bache & Co., (1973) 335 FSupp 1123.

Now was it material that Goldman was effectively selling Hudson Mezzanine short? Let us examine several court decisions.

“Materiality standard is whether reasonable man would attach importance to fact misrepresented in determining is choice of transaction in question….” Republic Technology Fund, Inc. v Lionel Corp., (1973) 483 F2d 540.

“Where information is kind to which reasonable investor would attach significance in making investment decision, its misrepresentation or omission is material within meaning of Section 17a of Securities Act.” SEC v R. J. Allen & Associates, Inc., (1974) 386 FSupp 866, affirmed 575 FSupp 622.

“Statement is only material if reasonable investor would consider it important in determining whether to buy or sell stock.” SEC v Jones &Co., (2004) 312 FSupp 1375

Furthermore the Courts have ruled that necessity of reliance on misrepresentation is not important- just that the misrepresentation was made.

“Reliance upon misrepresentation is not element of violation of antifraud provisions of Securities Act.” United States v Schaeffer, (1962) 299 F2d 625.

“Specific reliance by investor need not be shown in prosecution under Section 17(a) of Securities Act; rather what must be shown is that scheme had impact on investor.” United States v Ashdown, (1975) 509 F2d 793.

So why did the SEC not pursue a civil action under Section 17(a) of the Securities Act against Goldman Sachs for selling the Hudson Mezzanine and then shorting it- a clear violation of Section 17(a)?

Because protecting Goldman Sachs means more to the SEC than the welfare of the United States. Why? Because Wall Street has become a House of Cards, which will collapse if Goldman’s thefts are exposed.

Manfredonia, a former Wall Street trader, was thrown out and white-listed for exposing corruption as a whistleblower