Question

Dodona I, LLC, invested $4 million in two securities offerings from Goldman, Sachs & Co. The investments were in collateralized debt obligations (CDOs). Their value depended on residential mortgage-backed securities (RMBS), whose value in turn depended on the performance of subprime residential mortgages.

Before marketing the CDOs, Goldman had noticed several "red flags" relating to investments in the subprime market, in which it had invested heavily. To limit its risk, Goldman began betting against subprime mortgages, RMBS, and CDos, including the CDOs it had sold to Dodona. In other words, Goldman made investments based on the assumption that subprime mortgages and the securities instruments built upon them would decrease in value. In an internal e-mail, one Goldman official commented that the company had manager to "make some lemonade from some big old lemons." Never theless, Goldman's marketing materials provided only boilerplate statements about the risks of investing in the securities.

The CDOs were later downgraded to junk status, and Dodona suffered a major loss while Goldman profited. Assuming that Goldman did not affirmatively misrepresent any facts about the CDOs, can Dodona still recover under SEC Rule 10b-5? If so, how?

[Dodona I, LLC v. Goldman, Sachs & Co., 847 F.Supp.2d 624 (S.D.N.Y. 2012)] (See The Securities Exchange Act of 1934.)

Answer 1

Yes. Dodona can recover it by using SEC Rule 10b-5

The Securities Exchange Act of 1934 is a law governing the secondary trading of securities in the United States of America. A landmark of wide ranging legislation, the act of 1934 and related statutes form the basis of regulation of financial markets and their related parties in the United States. This law created for the purpose of govern the securities transaction in the secondary market, after issue,ensuring the transparency and accuracy and less fraud or manipulation.

In the case of Dodona and Goldman, SEC charges Goldman with fraud in structuring and marketing of CDO tied to subprime mortgages. Because he failed to provide the key information about the CDO to investors or he knowingly not discovered it. Here the product was new and complex but the deception is old and simple. Goldman permitted a person who was a client of him for betting against the mortgage market which heavily influence the mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent who is a third party. By this activity, the CDOs were downgraded to junk status, and Dodona suffered huge loss and Goldman find great margin of profit. It is an unethical activity and Dodona have the right to recover his loss.

In SEC Form 3, it helps in regulating insider trading, which is an individuals buying and selling of security based on non-public information. Filing Form 3 helps us to disclose who these insiders are and track any suspicious behaviors.

According to SEC, disclosure is mandatory. The information provided on the form is meant to disclose the holdings of directors, officers and beneficial owners of registered companies. This information become public record and is liable for inspection.

Who Can File SEC Form 3

• Any director or officer of an issuer with a class of equity securities
• A beneficial owner of greater than 10% of class of equity securities
• An adviser or beneficial owner of more than 10% of any class of outstanding securities
• A trust, trustee or beneficiary required to report.