The Wall Street Journal reported that Facebook has filed papers in Paul Ceglia’s case claiming 84% ownership of the company stating “[t]he purported contract at the heart of this case is a fabrication.” Facebook admitted that years ago founder Mark Zuckerberg performed software coding for Ceglia, explaining the existence of email correspondence between Zuckerberg and Ceglia. The only reason I thought there was a chance this could be more than a deluded or duplicitous plaintiff’s transparent grab at someone else’s riches was that Ceglia was represented by DLA Piper, a law firm one would not expect to crawl into bed with a low-life con man. (High-life con men might be another story.) In late June DLA Piper withdrew as Ceglia’s counsel for reasons undisclosed, but clear between the lines: Ceglia’s suit was baseless. It should just be a matter of time before the court disposes of it for good.
The SEC’s civil fraud suit against Goldman Sachs and Goldman employee Fabrice Tourre, filed yesterday in federal court in New York, alleges the defendants made “materially misleading statements and omissions in connection with a synthetic collateralized debt obligation (“CDO”) GS&Co structured and marketed to investors.” The structured-investment’s value was tied to performance of a portfolio of subprime mortgages selected, according to Goldman’s marketing materials, by ACA Management. According to the Complaint Goldman failed to disclose to investors that hedge fund Paulson & Co., Inc. “played a significant role in the portfolio selection process” while maintaining “economic interests directly adverse to investors”–in other words, while shorting the portfolio. The SEC alleges Paulson entered into credit-default swaps with Goldman on specific tranches of the CDO. According to the complaint Tourre was responsible for structuring the investment, knew of Paulson’s undisclosed short interest, knew Paulson’s role in selecting the portfolio, and misled ACA that Paulson had a $200 million equity stake in the deal. Goldman earned $15 million in fees for structuring the investment. Six months after the April 2007 closing 83% of the portfolio’s mortgages had been downgraded; by January 2008 downgrades stood at 99%. The SEC alleges investors lost over $1 billion in the deal, while Paulson made over $1 billion. Goldman called the complaint’s allegations “completely unfounded” and claims its long position lost over $100 million.
The 22-page complaint crisply describes structured securities, synthetic CDOs, compromising internal correspondence, and this entertaining email from Tourre to a friend three months before the deal closed:
“More and more leverage in the system, The whole building is about to collapse anytime now. . . Only potential survivor, the fabulous Fab[rice Tourre]…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!”
In another email before the deal closed Fabulous Fab wrote “the cdo biz is dead we don’t have a lot of time left.” All together the complaint paints an ugly picture, but that’s what complaints do.
Why is Paulson not a defendant? Because Paulson did not communicate anything to investors. Investor disclosure, not deal structure, is the heart of the alleged fraud.
Illinois lawyer Loren Friedman changed the Bs and Cs on his law-school transcript to As and Bs and landed a summer associate job at Sidley Austin, the large corporate Chicago law firm. Years later, when Friedman was working as an associate in a firm in New York, Sidley Austin discovered the lie. Friedman admitted his fraud to the Illinois bar, which may have remembered that Friedman previously admitted failing to disclose flunking out of medical school on his law school applications. In deciding the fate of his license to practice the Illinois bar knew Friedman to be a serial liar. The board hearing Friedman’s case decided to suspend his license for three years. The attorney-discipline agency appealed, seeking permanent suspension. The Illinois Ethics (there’s an oxymoron) Review Board just decided Friedman’s appeal. The result? Read the comments below or this article to find out.