Goldman Sachs Co-GC Surprised, 'Disappointed' by SEC's Suit
April 21, 2010
Gregory Palm, co-general counsel of Goldman Sachs Group, Inc. strongly defended his company Tuesday and told investors that the government's suit against the Wall Street giant took him by surprise.
Palm said his legal department spent the past 18 months talking and providing records to the Securities and Exchange Commission. But the agency didn't notify the company that it was filing suit last Friday. Palm said Goldman was "disappointed" by the charge.
Also See: SEC Complaint (PDF) and Press Release
Speaking in a conference call on the first quarter earnings report, Palm defended Goldman's integrity and business principles. The record shows the charge was unfounded, he said, and "we dispute the respective view of the facts in this case and the applicable law."
The SEC charged Goldman, Sachs & Co. and one of its vice presidents with defrauding investors. Goldman Sachs Group is the parent company of the broker-dealer.
The complaint alleges that the company misstated and omitted key facts about a financial product tied to subprime mortgages, as the U.S. housing bubble was beginning to burst in 2007.
The SEC said the company marketed a complex financial product, called a collateralized debt obligation or CDO, to investors without telling them that a major hedge fund that was betting against the mortgage market had played a key role in selecting the portfolio.
The hedge fund, Paulson & Co., paid Goldman Sachs about $15 million to structure a transaction in which Paulson could take short positions against mortgage securities that it helped choose.
While investors lost about $1 billion on the CDO, Paulson earned about $1 billion by betting against it, the complaint states.
Palm has been the company's GC, or now co-GC with Esta Stecher, since 1992 when he joined the bank from the law firm Sullivan & Cromwell. The law firm has previously written letters to the SEC defending Goldman's actions in the deal.
Repeatedly during Tuesday's call, Palm argued that the deal mainly involved two sophisticated institutional investors who jointly selected the portfolio. Both had the opportunity to fully examine the underlying assets, he said.
During a question and answer period, some investors asked about whether the major loser in the deal knew that Paulson was taking the short position. Palm replied that while Goldman brought the investors together, the company doesn't know what the losing party was thinking.
He apparently evaded a direct question about whether Goldman told the other party of Paulson's short interest by saying that the SEC complaint did not allege any incident where Goldman intentionally misled anyone.
In other answers, Palm said the SEC has looked generally at Goldman's mortgage deals but would not say if any other deals are under investigation at this time. He did say that there have been no conversations with the Department of Justice.
He said the company lost $100 million on its own investments in the deal. Asked why Goldman even invested, he indicated the deal wasn't closing until Goldman agreed to take a slice.
The loss apparently didn't set Goldman back. Earlier in the call the company told investors that its earnings rose 91 percent, to $3.5 billion or $5.59 a share in the quarter. And revenues increased to $12.8 billion, besting analysts' predictions by over a billion dollars.
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