Case comment: the need for careful analysis of the statistical summary in the response to the complaint in the SEC v. Goldman Sachs case

Abstract

In its response to charges by the Securities and Exchange Commission that the investment bank misled investors about the role a hedge fund manager had in selecting a securities portfolio involving subprime mortgages, the firm submitted statistics to support its argument that the losses incurred by the portfolio were due to the broad decline in the market for such securities that occurred in 2007–2008. This comment points out a logical flaw in the comparison of performance measures of the initial portfolio of 86 securities with that of the final or reference portfolio of 90. During the selection process in which the hedge fund manager and the bank participated along with the portfolio selection agent, 20 of the original 86 securities were dropped and 24 others added. The statistical summary compares the average values of several performance characteristics of the two portfolios; however, the fact that 66 securities or approximately 75% were common to both renders that comparison virtually meaningless. A more appropriate statistical assessment of that stage of the selection process focuses on the relative performance of the 24 new securities included in the final portfolio of 90 to that of the 20 that were dropped from the Initial-86. A careful examination of the reported statistics shows that the difference in the average percent write-down of these two sets of securities is at least 18%. Furthermore, under an additional assumption that will require further checking from more detailed data, the average time to write-down of the 24 new securities was statistically significantly less than that of the 20 that were dropped. Similar results were obtained when the final portfolio of 90 was compared with the universe of 293 similar securities described in the bank’s response. Both the average percent writedown and the average time to write-down of the 293 securities were less than that of the Reference-90.