On Goldman and disclosure…

April 19, 2010

One of the big issues that has popped up since Friday’s surprising announcement by the Securities and Exchange Commission that it was charging Goldman Sachs with fraud is whether Goldman should have been more forthcoming in their routine SEC filings that an investigation was pending.

On Saturday, Bloomberg reported that the investigation began 9 months ago. In today’s Heard on the Street column, the WSJ also dates the Wells Notice to July 2009. Reuters reported that the SEC had issued a Wells Notice six months ago. But whatever the correct date is, one thing is very clear: there was no mention of this in any of Goldman’s filings.

Since we tend to spend a lot of time here at footnoted taking deep dives into the filings and routinely report on regulatory actions like Wells Notices, we decided to put this issue under the proverbial microscope. As with a lot of things in SEC filings, it all boils down to an issue of materiality: was the existence of the Wells Notice material enough to Goldman that it required disclosure? The rules on materiality are pretty vague and it’s now clear that Goldman’s attorneys came to the conclusion that the Wells Notice was not material, even if the market seems to disagree.

Given Goldman’s size and the amount listed in the complaint, reasonable people can certainly argue that the Wells Notice was not material, even if other companies routinely file 8Ks for far less serious interactions with the SEC, like responding to a comment letter or an informal investigation.

At a breakfast this morning at the National Press Club that Theo attended, David Z. Seide, a partner with Curtis, Mallet-Prevost, Colt & Mosle in Washington and former Assistant US Attorney in Los Angeles said, “This is a bet-the-franchise kind of thing, it’s their whole business model.” And that’s the job of a disclosure attorney, “you have to look into the future and figure it out,” he added. George B. Curtis, a partner at Gibson Dunn & Crutcher in Washington, DC., a former Regional and Deputy Director of the SEC’s Division of Enforcement between 2006-2009, noted that “There’s no bright line.”

If Goldman’s argument was that the Wells Notice was not material, they may see some challenges from other very large companies that have disclosed Wells Notices in the past. A quick skim of Morningstar Document Research of companies over $50 billion in market cap that have disclosed the existence of Wells Notices in the past turns up General Electric (GE), Bank of America (BAC), UBS (UBS) and units of both Berkshire Hathaway (BRK.A) and of JP Morgan Chase (JPM).

If disclosing a Wells Notice was material enough for these companies, why was it not material enough for Goldman?

Image source: Faiz Scientific

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