The Securities and Exchange Commission has charged Goldman Sachs with fraud for not disclosing key information to investors in a $1 billion mortgage derivative deal. The government says that the bank put the interests of hedge fund Paulson & Co.—a client that wanted the portfolio to go down in value—ahead of the interests of the investors who purchased the the products, by not disclosing Paulson & Co.'s position. But in newly revealed testimony to the SEC, a former executive of Paulson & Co., Paolo Pelligrini, claims he told a lead investor in the portfolio that his company planned to bet against (or "short") the products. Some observers say the testimony could doom the SEC's case. What's the prognosis for Goldman? (Watch a Bloomberg report about the SEC's charges.)
This is bad news for the SEC: Pellegrini's testimony is "incredibly devastating," says Joe Weisenthal in Business Insider. His statement "directly refutes" the SEC's claims that the investors "had no idea" Paulson planned to short the mortgage packages. This is "massively exculpatory" for Goldman.
"The Paolo Pellegrini testimony is devastating to the SEC"
The SEC could still prevail: The SEC will still "get what it wants," says Charlie Gasparino in the Daily Beast — specifically, "a settlement from Goldman." No judge or jury is going side with Wall Street's most hated firm and functionally "declare that the status quo of secret relationships is a good thing."
"Why Goldman will settle"
The government may still have cards up its sleeve: Without knowing the details, it's hard to judge the damage the testimony could do to the SEC's case, says Felix Salmon in Seeking Alpha. The SEC still has a lot of information in reserve—and prosecutors seem to have "confidence" that "Pellegrini’s testimony doesn’t really end up being all that powerful." That, or the SEC is just "dragging this whole thing out" to keep "the pressure on Goldman."
"Did ACA know Paulson was going to short?"
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