It’s been just over four years since the Securities and Exchange Commission rocked the financial world and sued Goldman Sachs & Co. for misleading investors in its Abacus collateralized debt obligation. The company settled for $550 million in July 2010.

At the same time the SEC sued Goldman, it also filed suit against Fabrice Tourre, who was a 28-year-old Goldman vice-president at the time of the Abacus deal who helped market the CDO. Tourre refused to settle, and last August a Manhattan federal jury found him liable on six of seven counts of misleading investors. In March Tourre was ordered to pay more than $850,000 in penalties and restitution. At press time, he had not indicated whether he will appeal.

While the SEC’s case against Goldman and Tourre was successful, the question remains why the agency didn’t sue anyone at Goldman more senior than Tourre. The New York Times, for example, asked that question in May 2011, noting that Tourre’s defense lawyers maintained his work on Abacus was part of a “collaborative effort.”

To try to answer that question, and to find out more about the SEC’s Goldman Sachs investigation, The American Lawyer reviewed transcripts of more than 30 sworn interviews of SEC lawyers and others at the agency involved in the Abacus case. These interviews, obtained through a Freedom of Information Act request, were conducted by then-inspector general David Kotz in the summer of 2010, after he was asked by Republican Congressman Darrell Issa to find out if the Goldman case was politically motivated. Kotz concluded it wasn’t.

Kotz included portions of these interviews in a heavily redacted September 2010 report, but these transcripts fill in many details and provide a rare look at internal SEC decision making. The following is a timeline of the SEC’s Abacus investigation and lawsuit, based on material from those interviews.

2007
April 26: Goldman Sachs & Co. sells the Abacus synthetic CDO to two large institutional investors.

Goldman collects $15 million for arranging the deal. John Paulson, a hedge fund manager who helped select reference mortgages for the CDO and then bet against it, ultimately makes $1 billion. Investors, who were not told of Paulson’s role selecting mortgages, lose $1 billion.

2008
August 25: The Securities and Exchange Commission opens an investigation into potential misrepresentations by Goldman in marketing Abacus.

2009
March 3-4: The SEC takes the sworn testimony of Goldman trader Fabrice Tourre.

July: The SEC sends Goldman a Wells notice, informing it that the SEC enforcement staff plans to recommend charges against it over the Abacus transaction.

Summer: SEC trial attorney James Kidney is assigned to the Goldman investigation, which is led by then associate director Cheryl Scarboro and assistant director Reid Muoio. Scarboro and Muoio are focused on charging Tourre, who has written some incriminating emails.

Kidney becomes concerned there are “obvious holes” in the investigation. He wants the SEC to take the testimony of Tourre’s supervisor, Goldman managing director Jonathan Egol, as well as the testimony of Paulson.

Muoio, who leads the day-to-day investigation, resists taking Egol’s testimony. According to Kidney’s later testimony, Muoio tells Kidney it would be a waste of time because he knows that Egol will say that he was too busy to focus on the Abacus deal.

When later interviewed by Kotz, Muoio confirmed that he didn’t think it made sense to interview Egol. “It would have been not a good use of staff resources,” he said. “We were highly unlikely, highly unlikely to have a case against him.”

Muoio, who is still at the SEC, declined to comment for this story. Scarboro, now a partner at Simpson, Thacher & Bartlett, did not respond to requests for comment.

Sept. 15: Goldman, represented by Richard Klapper of Sullivan & Cromwell, has a Wells meeting with Scarboro, in which the SEC lays out its case against the investment bank.

Sept. 17: Stephen Cohen, the senior adviser to SEC Chairman Mary Schapiro, emails Muoio: “I have heard about the [Abacus] case. Will any individuals be Wellsd? The chairman actually asked about that investigation specifically yesterday. … The chairman will be glad to hear we’re going after an individual.”

Schapiro, who joined the Promontory Financial Group in April 2013, declined to comment for this story. Cohen, who is now an associate director in the SEC’s enforcement division, did not respond to a request for comment.

Sept. 28: The SEC sends Tourre a Wells notice, informing him that the SEC enforcement staff plans to recommend charges against him.

Oct. 29: The SEC meets with Tourre.

Oct. 30: The SEC takes the testimony of hedge fund manager Paulson.

Nov. 2: The SEC issues a subpoena for Egol’s testimony. Egol’s lawyer later responds that his client won’t be able to meet until January 2010.

Nov. 13: Muoio reserves a spot on the SEC commissioners’ calendar for Dec. 17 for them to consider the enforcement division’s recommendation to sue Goldman and Tourre.

Nov. 18: Wanting to delay a vote on the Goldman case until Egol testifies, Kidney raises his concerns with Schapiro’s adviser Cohen. He writes in an email to Cohen that he’s “knocking my head against brick walls” trying to get the vote delayed.

Dec. 6: Kidney, upset over the scheduled vote on the Abacus case, emails Cohen that he’s withdrawing from the case.

Dec. 8: The division of enforcement withdraws the Abacus case from the calendar.

Dec. 9: In an email to Cohen, Kidney credits SEC lawyer Mark Adler—Kidney’s supervisor and then the acting head of the SEC’s trial unit—with getting the Goldman case taken off the commissioners’ calendar.

Around this time Adler persuades Kidney to rejoin the Abacus team. Kidney told Kotz later: “I was called into Adler’s office and was told that the front office didn’t want me to drop out of the case. They liked the fact that I was aggressive.” Kidney testified that he believed that these “front office” lawyers were enforcement director Robert Khuzami and deputy director of enforcement Lorin Reisner.

Adler, who is now deputy chief counsel of the Public Company Accounting Oversight Board, did not respond to requests for comment for this article.

Dec. 24: The New York Times runs an article on CDOs that prominently features Goldman’s Egol. It says that from 2004 to 2008, Egol helped Goldman issue 25 Abacus-type deals with a total value of $10.9 billion.

Cohen emails Schapiro about the Times article: “This is our Goldman CDO case in excruciating detail.”

2010
January: Scarboro becomes head of the SEC’s Foreign Corrupt Practices Unit. The Abacus case is now led by Kenneth Lench, the head of the SEC’s newly-created structured and new products unit.

Jan. 7: The SEC takes the testimony of Egol, who is represented by Frank Wohl of Lankford, Siffort & Wohl. Goldman’s lawyer, Klapper of Sullivan & Cromwell, is also present.

According to his testimony to Kotz, Muoio believes that the interview didn’t unearth anything to warrant charges against Egol.:“We didn’t lay a glove on him.”

However, Kidney and two other members of the team, including Reisner, are encouraged by Egol’s testimony, according to Kidney’s later interview with Kotz :“[Egol’s] own testimony I think helped pick up steam, and Lorin [Reisner] got more involved, and like I stated, asked for memos, collection of evidence, and seemed to get really involved in it.”

The commissioners’ vote on the case is scheduled for Jan. 28.

Jan. 24: Schapiro emails Cohen: “I’m very anxious to get the Goldman case out. Do we name individual? No settlement.”

When Kotz later asked her about this email, Schapiro explained: “I’m anxious for us to have a strong enforcement presence generally.” Kotz didn’t ask her or Cohen what she meant by “no settlement.”

Jan. 26: SEC lawyers working on the ABACUS case meet with Commissioner Troy Paredes, one of two Republicans on the five-person commission.

Paredes is very skeptical that the misstatements in the marketing material that a neutral third party selected the mortgage portfolio were misleading, according to what Kidney told Kotz later. Paredes is also concerned about bringing a case against Goldman if only a lower level employee was culpable, according to Kidney’s testimony: Paredes “raised the issue of whether Goldman could be held liable if we only named Tourre, whether there was sufficient legal authority to–under respondeat superior–to hold Goldman liable for the conduct of Tourre.”

When interviewed by Kotz, Paredes said he didn’t recall why the Goldman case was taken off the calendar. Paredes, who is now a fellow at the Hoover Institution, did not respond to a request for comment for this story.

Jan. 27: Muoio sends an email to other SEC lawyers labeled “urgent.” He says Reisner is “available right now through 12:00 noon to discuss whether or not to pull the recommendation from tomorrow’s calendar, which he is inclined to do.”
Cohen sends an email a few minutes later: “Please pull the abacus from the calendar at the request of the enforcement division. It will be rescheduled shortly.”

Khuzami later told Kotz that the vote was delayed primarily to get a more complete statement from one of the Abacus investors, IKB Deutsche Industriebank AG. “This is a significant witness in the case,” Khuzami explained to Kotz. “You know, candidly Goldman has influence, as [do] many defendants, so you had to worry very much what if this witness kind of runs for the hills when the case is filed. You haven’t got him locked in.”

Jan. 29: The SEC sends Egol a Wells notice, informing him that the SEC enforcement staff plans to recommend charges against him.

February: Members of the enforcement staff travel to Germany to get affidavits from IKB.

Late February: Goldman CEO Lloyd Blankfein asks for a meeting with SEC chair Schapiro. His request is denied.

March 4: Egol’s counsel Wohl meets with SEC lawyers. Goldman’s counsel Klapper is also present.

March 5: Khuzami and Reisner ask the enforcement staff to prepare a memo analyzing Egol’s possible liability. Reisner, Kidney and another SEC lawyer, Richard Simpson, are in favor of charging Egol. Muoio is not.

March 23: Khuzami emails the ABACUS team: “I’m a no on [Egol].” An upset Kidney quits the team, replying: “I’m out.”

In his testimony, Kidney later said, “That was childish of me and impulsive,” and said he apologized to Khuzami and asked to stay on the case.

Responding to a request for comment, Resiner—who is now chief of the criminal division of the Manhattan U.S. Attorney’s office–says he’s “completely comfortable” with the decision not to charge Egol.

April 1: The enforcement staff submits a memo to the commissioners recommending a case against Goldman and Tourre.

April 14: The Commission approves the case in a 3-2 vote, with Republican Commissioners Paredes and Kathleen Casey voting against bringing the case.

April 16: The SEC files its lawsuit against Goldman and Tourre, and the company’s stock drops 13 percent.

April 19: Goldman proposes settlement terms: It offers to pay $500 million and admit to making a mistake by not disclosing Paulson’s role.

Over next three months the SEC and Goldman negotiate over the Abacus case, as well as the SEC’s open investigations into roughly a dozen other Goldman CDOs.

Khuzami later told Kotz: ““The big issue is they wanted a global settlement, because we had eight, ten, twelve other matters that we were looking at, and they didn’t want to settle one and then have four other cases be filed against them. And so we had agreed to finish up our investigation of these other matters so we would be able to let them know what the status was, so that they could decide whether or not they wanted to settle. So that continued. That took up a lot of time, I think in May and June and even early July.”

July 16: The SEC announces a settlement of the Goldman Abacus case. Goldman agrees to pay $550 million and to admit making a mistake in its disclosure.

Khuzami told Kotz that the SEC at the same time concluded its investigations into the other CDOs without recommending charges, but said these other investigations were not part of the settlement. “This was not a $550 million settlement for 11 cases,” he said. “We may tell Goldman that we are concluding our investigations in these other matters without recommending charges, but that doesn’t mean we’re settling them. And that was an important point for us, because we didn’t want them out there saying, you know, they settled 12 CDO investigations for an average of $30M each, and, you know, didn’t [Goldman] get a great deal. So the way we structured the settlement was everything [in the settlement] spoke only to Abacus.”

Summer: Assigned to a lesser role, Kidney moves off the Abacus case to work on other matters. (In 2011 he would win a conviction against a former executive of private equity firm TPG Capital Inc. for facilitating insider trading. He would also be one of the lead lawyers on the SEC’s fraud case against six former executives of Fannie Mae and Freddie Mac.)

2013
August 1: Tourre is found liable by a federal jury in Manhattan of six of seven counts of misleading investors.

2014
Feb. 28: The Wall Street Journal reports that Egol has left Goldman Sachs.

March 12: Manhattan U.S. District Judge Katherine Forrest orders Tourre to pay more than $825,000.

March 28: Kidney retires from the SEC, after 24 years with the agency. In a speech at his retirement party, he praises his colleagues in the SEC’s rank and file but criticizes the agency for spending too much energy going after small targets. He says: “[The SEC is] an agency that polices the broken windows on the street level and rarely goes to the penthouse floors.”