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Goldman Weasels in Kangaroo Court

Senior writer Dan Freed thinks Goldman Sachs has a good chance to win its battle with the SEC since the case is starting to look more politically motivated than legally viable.
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)--There are two basic facts about the

Goldman Sachs

(GS) - Get Goldman Sachs Group, Inc. Report

fraud case that are getting lost as details emerge about the complex case.

First, Goldman Sachs, like the rest of Wall Street, rests firmly on a bedrock of weaseldom. In fact, I think it is fair to say that part of the reason Goldman is more successful than competitors like


(C) - Get Citigroup Inc. Report


Morgan Stanley

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Bank of America

(BAC) - Get Bank of America Corp Report

is that Goldman has better lawyers, or, put differently, better weasels.

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Second, the fraud charges brought by the SEC against Goldman are all about politics. Mike Mayo, a veteran securities industry analyst at CLSA, put this succinctly in a recent report, pointing out that President Obama appeared just three hours after the

Securities and Exchange Commission

announced its charges against Goldman to stress the importance of passing financial services reform legislation.

"The connection appears clear to us: pass a bill and the heat will subside," Mayo wrote.

But just because a case is political doesn't mean it isn't justified, to paraphrase former New York Governor Eliot Spitzer, who ought to know a thing or two about politics, Wall Street and the law.

I certainly hope he's right. I am rooting against Goldman, even though I sense the case against the bank is weak from a legal standpoint.

Goldman boosters Wednesday were seizing on a

CNBC report

that Paolo Pellegrini , a former executive at hedge fund

Paulson & Co.

told government investigators he informed

ACA Capital Management

that Paulson planned to short Abacus 2007-AC1, the toxic financial creation at the heart of the Goldman case. The SEC has said Goldman failed to disclose to ACA Capital that


was in the laboratory with the mad scientists that helped build the "Frankenbond" that was Abacus 2007-AC1, helping them choose the shady mortgages he planned to bet against.


argued the testimony from Pelligrini

appears to weaken

the SEC's case, though I'm not quite sure I agree. Goldman general counsel Greg Palm told reporters yesterday that Goldman was not privy to conversations between ACA Capital and Paulson & Co. executives. If that's true, I don't see how Goldman was relieved from its duty to disclose to ACA Capital that Paulson was on the short side, if it indeed had one.

Whether Goldman really had such a duty is a larger question, and I have to admit I don't understand why it did. ACA Capital is not somebody's grandmother, responding to a sinister direct mail ad. This is a giant institution that simply bet big and bet wrong. If they didn't know a short-seller helped create the deal, it seems to me they should have known, but here my limited knowledge of how such deals are put together puts me (and nearly everyone opining on the legality of this deal) at a disadvantage.

Goldman has argued it had no duty to tell ACA Capital that Abacus was put together by shorts, and has also argued (less persuasively) that ACA Capital and not Paulson put together the deal. I'd bet Goldman is right and the SEC is wrong. As the writer Bill Cohan told me last week,

Goldman's lawyers

are the last people you'd expect to screw up on something like this.

No, it's not hard to imagine the SEC's lawyers put together a crappy case. If they were any good, they'd be working for Goldman.

So is President Obama wearing brass knuckles in his fight with Goldman and the rest of Wall Street? I sure hope so. I'm not sure how he can win otherwise.


Written by Dan Freed in New York