Before the SEC (SEC news) filed its charges against Goldman Sachs (NYSE: GS), the investment bank was under fire, due partly to aggressive reporting. Goldman Sachs' law firms prepared various memos outlining a possible defense. The New York Times obtained the memos and notes that part of the firm's defense is that big buyers of CDOs (CDO news) are very sophisticated investors with a lot of expertise and technology at their disposal. Therefore, they knew exactly what they were getting into. As a blanket defense, that might or might not be persuasive.

The memos are more interesting when it comes to the nondisclosure of Paulson & Co.'s (John Paulson news) role specifically. According to the New York Times, in it's Sept. 10 response to the SEC, Goldman Sachs said: "But the Reference Portfolio, however it was selected, was fully disclosed and available for all to evaluate on its merits. To the extent that investors took comfort from ACA's involvement, it was only because an independent expert had approved the portfolio, and that is precisely what ACA did. ACA plainly exercised its own judgment in deciding which securities were included (whatever its impression as to the economic interests of Paulson), rejected dozens that it disliked, and was entirely satisfied with the resulting portfolio."

This might be more persuasive. If ACA routinely disregarded the recommendations of Paulson & Co., the SEC's case looks less compelling. I think it's going to boil down to how powerful Paulson & Co.'s portfolio picks were and whether they were expected to be followed to some degree. About the notion that Paulson was wrongly thought to be a long investor: "The interests of an equity investor would not necessarily be aligned with those of ACA or other noteholders, and holders of equity may also hold other long or short positions that offset or exceed their equity exposure." Indeed, the memo noted another deal that ACA managed in which a hedge fund both bought equity and took short positions on the mezzanine level. 

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