Goldman Sachs and their Disclosure Failure

After many hours of research and writing on the Goldman Sachs lawsuit, I better understand the allegations being made by the Securities and Exchange Commission. This lawsuit is closely related to the topics of disclosure and transparency which have been significant parts of our Investor Relations class this semester. This case helps to better understand the federal regulations about disclosure and which action can be taken to punish businesses that do not participate in proper disclosure, or do not provide significant information to their investors.

When trying to understand the case, I viewed various documents from the Securities and Exchange Commissions, along with the various responses put out by Goldman and Sachs in their defense. An article put out by the New York Times on the day that lawsuit was filed was helpful in understanding difficult concepts related to the case. The story, written by Louise Story and Gretchen Morgenson explained how the SEC complaint against Goldman Sachs is the first important action being taken in response to the 2007 financial crisis.

The New York Times briefly described the federal actions being taken, the market reactions and the response of the company. It states that, Goldman Sachs is being accused of creating and selling mortgage investments that were intended to fail. While those that invested in the securities lost upwards of $1 billion on the transaction, hedge fund Paulson & Co. profited off of investors loses. Paulson was involved in selecting the investments Goldman Sachs would market, yet investors were not aware of Paulson & Co. involvement in the selection process. Investors were told that the ABACUS was chosen by an independent third party, without mentioning Paulson involving, and that the hedge fund operator was betting on the failure of the ABACUS.

This lawsuit is closely related to various topics we have covered in Investor Relations this semester. We discussed different disclosure regulations, and making sure the public and investors are constantly aware of different actions being taken by a company. This case shows the severity of the actions that will be taken if a company chooses to present false or insufficient information to the public. It will be interesting to see what happens with this lawsuit as the SEC attempts to punish various companies for their involvement in the financial crisis.