Professor David Lipton Interviewed by Bloomberg News
About the SEC's Case Against Goldman Sachs
Professor David Lipton, director of the Securities Law Program at the Columbus School of Law, spoke with Bloomberg Law's Spencer Mazyck about issues in the Securities and Exchange Commission's lawsuit against Goldman Sachs Group Inc.
Interviewed in the financial network’s New York City studios on May 3rd, Lipton outlined some of the key points and challenges in the case filed against Goldman Sachs by the SEC on April 16. (Link to audio podcast).
The SEC accuses Goldman Sachs and one of its vice presidents of defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter.
The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities. Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.
Goldman Sachs argues that the charges were the result of the actions of one employee. Lipton noted that standards of supervision are clear in securities regulation, and predicted that the financial giant may have a hard time selling that defense in court.
“Everybody thought it was going to settle ahead of time. At this point, an awful lot of damage has been done to Goldman’s reputation. If they settle now, they settle with an awful stain on their reputation,” said Lipton.
In the eyes of many observers, the case illustrates a profound shift in the financial services industry. It has slowly moved away from customer service as its chief source of revenue and is heavily dependent today on its own trading to bring in the dollars.
Because of this, Lipton predicted that the SEC’s legal action against Goldman Sachs would add steam to legislative proposals aimed at clarifying the fiduciary duty to disclose conflicting financial interests.
“This case is going to move the borders a bit about what that broker has to disclose, because there is an inherent conflict,” he said.