Starting from paragraph 44, page 13 of the lawsuit the SEC describes in detail how Fabrice Tourre allegedly misled ACA into believing that it was a long investor and not betting against the portfolio of mortgage backed securities by shorting it.

In others words, the SEC alleges that Goldman Sachs knew that ACA was operating under the false belief that the Paulson was "investing in the equity of ABACUS 2007-ACI" or the underlying mortgage securities, but Goldman Sachs did nothing to alert ACA to the contrary that Paulson was shorting the securities.

The Goldman Sachs press release is materially misleading to investors and it can give rise to additional securities law violations under Rule 10b-5. The SEC complaint has a very sound basis in both fact and the law under Rule 10b-5, contrary to the Goldman Sachs press release which claims that "the accusations are unfounded in law and fact."

Other Potential Disclosure Problems Facing Goldman Sachs

Before the SEC files a lawsuit, it notifies the company or individual that it is conducting an investigation and later sends them a "Wells Notice" that its plans to recommend enforcement action against the recipient. Since an SEC investigation or the receipt of a Wells Notice is considered a material event, companies must promptly disclose them to investors in 8-K filings with the SEC. However, Goldman Sachs made no such disclosure of any such "Wells Notice" in its filings with the SEC and is now open to potential litigation from investors for its failure to disclose those material events. See Business Week article here.

Eoin Treacy's view If the investigations following the Nasdaq bust are anything to go by this lawsuit is only the opening salvo against the banking sector. A number of similar structures were put together by other banks and while it may be difficult to prove fraudulent intent, litigators, particularly those with political ambitions, will probably try.

Another important precedent set by previous investigations is that the penalties eventually paid by the companies concerned have been relatively insignificant compared to the profits made during the boom years. Most of the individuals concerned in such suits have tended to hold onto their accumulated wealth and this is unlikely to change regardless of public opinion towards the sector.

The already tarnished image of the banking sector is going to suffer further as this saga rumbles on but rather than succumb to emotion, individual banks need to be judged on their individual merits. Earnings continue to surprise on the upside, including for the banking sector. Monetary conditions remain extraordinarily accommodative. While Goldman Sachs is the focus of the current investigation and this article from Bloomberg suggests that Bank of America may have inherited some liability from Merrill Lynch, most other banks and particularly regional banks are relatively divorced from this particular issue.

The S&P500 Banks Index has posted positive returns for 10 consecutive weeks and counting, and has become somewhat overextended relative to the 200-day moving average in the process. However, a sustained move below the now rising MA would be required to question medium-term upside potential.

The S&P500 Diversified Financials has lagged somewhat over the last couple of months and pulled back sharply on Friday as a result of the suit against Goldman Sachs. However, a sustained move below 300 would be required to question the consistency of the medium-term uptrend.

The KBW Regional Banks Index continues to outperform the S&P500 and while it is relatively overextended relative to the MA, a sustained move below 52.5 would be required to begin to question the consistency of the advance. 37 of the 50 shares in the Index have made at least new 6-month highs in the last 5 days. None are making new lows. (Also see Comment of the Day on February 11th).


Bank of Hawaii Corp has retraced most of the bear market decline and broke above the psychological $50 level this week. A downward dynamic would be required to check the advance beyond a brief pause while a sustained move below the most recent reaction low, near $42, would be required to limit medium-term upside potential. SVB Financial has a similar pattern.

BOK Financial has also retraced most of the bear market decline and continues to consolidate above $50. A break of the progression of rising lows, currently near $45, would be required to begin to question the medium-term consistency of the advance.

Prosperity Bankshares is among the better performers in the Index as it continues to consolidate above $40. A sustained move below $37.75 would be needed to question the consistency of the medium-term uptrend.

First Financial Bancorp has rallied impressively from last year's low and is currently testing its previous highs in the region of $20. Some consolidation of recent powerful gains appears likely given the proximity of the all time high, but a sustained move below $18 would be required to check the consistency of the short-term uptrend while a decline below the 200-day MA would be needed to question the medium-term uptrend.

IberiaBank Corp did not experience the same bear market decline as the others and has now rallied to test the upper side of the 6-year range. A decline below $55 would be required to trigger a Mid-Point Danger Line (MDL) stop, as taught at The Chart Seminar, and question the consistency of the medium-term advance.

FirstMerit Corp has sustained a progression of higher reaction lows from its March 2009 lows and the wider base formation has a great deal of symmetry. A sustained move back below $20 would be required to limit potential for additional medium-term upside.

Of the larger financial institutions, Wells Fargo, American Express, T-Rowe Price, PNC Financial Services, M&T Bank Corp and Comerica among others remain in consistent medium-term uptrends and while somewhat overextended relative to the 200-day moving average, they would need to break their progressions of rising reaction lows to question potential for additional medium-term upside. (Also see Comment of the Day on January 12th).