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deal—before accounting for its $15 million fee—because the firm got stuck holding a piece of ABACUS in April 2007 that it could not sell to other investors besides ACA and IKB. Nevertheless, the SEC claimed that Goldman and Tourre “knowingly, recklessly or negligently misrepresented in the term sheet, flip book and offering memorandum for [ABACUS] that the referenceportfolio was selected by ACA without disclosing the significant role in the portfolio selection process played by Paulson, a hedge fund with financial interests in the transaction directly adverse to IKB, ACA Capital and ABN. [Goldman] and Tourre also knowingly, recklessly or negligently misled ACA into believing that Paulson invested in the equity of [ABACUS] and, accordingly, that Paulson’s interests in the collateral selection process were closely aligned with ACA’s when in reality their interests were sharply conflicting.” The SEC asked the United States District Court in the Southern District of New York to find that both Goldman and Tourre violated federal securities laws, to order them to disgorge “all illegal profits” they obtained from “their fraudulent misconduct,” and to impose civil penalties upon them.
    Goldman at first seemed flat-footed in reacting to the filing of the SEC complaint, in part because it took Goldman almost completely by surprise—itself a highly abnormal turn of events for the ultimate insider firm. Blankfein told Charlie Rose, on April 30, 2010, that he got the news of the SEC’s civil suit “in the middle of the morning” coming across his computer screen. “I read it and my stomach turned over,” he said. “I couldn’t—I was stunned. I was stunned, stunned.”
    During the summer of 2009, Goldman had received a so-called Wells notice from the SEC and, in September, Sullivan & Cromwell, Goldman’s longtime law firm, had provided the SEC with lengthy responses to its inquiries in hopes of being able to persuade it not to the file the civil charges against Goldman. But then the SEC stopped responding to S&C and to Goldman, which tried again to contact the SEC during the first quarter of 2010 to see if a settlement could be reached. The next communication from the SEC came with the filing of the complaint on April 16, which happened to be the same day the SEC inspector general issued a critical report about the SEC’s bungling of its investigation into the Ponzi scheme perpetrated by Bernard Madoff.
    The news media—understandably—focused on the fraud charges against Goldman, rather than the SEC’s poor handling of the Madoff case, a fact Goldman noted in its communications with journalists. When Goldman eventually responded to the SEC’s complaint, it denied all allegations. “The SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation,” Goldman said initially. A few hours later, the firm offered a more elaborate defense: its disclosure was adequate and appropriate, the investors got the risks they wanted and bargained for, and, in any event, everyone was a big boy here. Moreover Goldman claimed it “never representedto ACA that Paulson was going to be a long investor.” Besides, Goldman ended up losing money. “We were subject to losses and we did not structure a portfolio that was designed to lose money,” the firm said.
    Goldman also provided some background about the deal. “In 2006, Paulson & Co. indicated its interest in positioning itself for a decline in housing prices,” the firm explained. “The firm structured a synthetic CDO through which Paulson benefited from a decline in the value of the underlying securities. Those on the other side of the transaction, IKB and ACA Capital Management, the portfolio selection agent, would benefit from an increase in the value of the securities. ACA had a long established track record as a CDO manager, having 26 separate transactions before the transaction. Goldman