One last card metaphor for the Goldman suit before I return to writing and teaching my final classes.

One way to think about the SEC's allegations against Goldman with respect to misleading ACA, the collateral manager is to think about what card game Goldman allegedly led ACA to believe it was playing.  According to the SEC, Goldman misled ACA into believing that Paulson was its bridge partner when really it was playing poker against it.

It is true that in a synthetic CDO unlike a normal CDO, the CDO issuer doesn't buy cash-producing assets but enters into derivatives to mimic cash-producing assets.  It thus needs a derivative counterparty.  Thus ACA as collateral manager and the CDO investors should have known that there was a party out there betting against them -- a poker player.

But that doesn't mean they should have known it was Paulson.  In fact, that is the crux of the SEC Complaint; the SEC alleges Goldman misled ACA and by extension the CDO investors into believing Paulson was investing in the CDO and had interests aligned with ACA.  If you think someone is your bridge partner, you are not going to be skeptical that they are going to request you pick up bad cards.

But if ACA knew Paulson was on the opposite side of the synthetic CDO bet, it would take a sharper look at the assets Paulson wanted and bargain hard -- more arm's length -- when it received a request that Paulson wanted those assets in the deal.

Again, much will turn on whether Goldman's statements, silence, actions, and inactions misled ACA and the CDO investors in this regards.  If the Goldman team thought that ACA was under a misimpression that Paulson was investing in the CDO not betting against it, prudent practice would be to disclose.  But we are beyond figuring out what best practices would have been at the time and now down to brass tacks of waiting for specific facts and combing through the elements of 10b-5 and 17(a) claims.  

Do the legal standards of Rule 10B-5 or Section 17(a) in evaluating whether Goldman misled ACA as to Paulson's true interest or should have disclosed to investors Paulson's role and interest in picking collateral change because these are high risk securities or because this was a synthetic pure bet CDO?  When you frame it that way, I'm not sure they do.   

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