The case tracked closely the one brought by the Securities and Exchange Commission last year. Basically, Goldman was accused of selling a foreign investor a stake in a collateralized debt obligation while failing to disclose it had a short position on the underlying mortgage securities.

The judge threw out the case based on a recent U.S. Supreme Court ruling that held that securities fraud laws only apply to deals that take place in the U.S. Of course, in the age of electronic communications, global financial firms and international investments it can be quite tricky to find out where a deal actually “takes place.”

The plaintiffs will no doubt refile their complaint with allegations that the deal really did take place in the U.S. The judge gave them 30 days to do so. If that fails, they could try to bring a case under state law or perhaps in a foreign jurisdiction.

But for now we’ve once again been deprived of an examination of what counts as fraud in these synthetic collateralized debt obligations.

It’s an important question for an investment bank putting together this kind of deal, since they require someone involved—either an outside investor or the bank—to take the short position. There’s always a conflict of interest in a synthetic CDO.

The settlement of the SEC case—and the dropping of fraud charges altogether—and the dismissal of this case means that we don’t have an answer to the questions of what sort of relationship is appropriate and what kind of disclosure is required. Do buyers actually have to be misled? Does there have to be an intent to mislead?

This kind of clarity would benefit both outside investors and Wall Street. But it's hard to blame Goldman for not wanting these questions answered in a lawsuit against them.

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