Reading the SEC's allegations against Goldman (available here), I was reminded of the case against Bear Stearns hedge fund managers Cioffi and Tannin. From the excerpts of emails given by the prosecution during this case, it seemed that Cioffi and Tannin clearly deceived investors. However, the defense argued that the prosecution's damning quotations had been taken out of context and did not reflect the concrete views of the defendants. Furthermore, it was difficult to link these discussions to actually proving that the managers mislead investors. Cioffi and Tannin were acquitted of any criminal wrongdoing.
The same might be true for Goldman. "Fabulous Fab" Tourre's infamous comments on the CDO market in emails is not substantial evidence against the firm. Paulson advising on which mortgages to put in the portfolio is also not outright illegal. The defense will argue these were suggestions and ACA had no obligation to accept these suggestions. It is unclear if ACA knew of Paulson's substantial short position in other CDOs. But even then, neither Paulson nor Goldman was legally obligated to inform ACA of their positions in other securities, both of whom were strongly short MBS at this time. I'm also not sure Goldman had to legally disclose the role of Paulson if his role was unofficial. It seems to me that the formation of ABACUS 2007-AC1 was legally sound. The shady/unethical part of the transaction was mostly informal and achieved through the clout of Goldman as a counterparty.
The key to this case is the negotiations between Paulson and ACA. The prosecution will win if it can convince the jury that Goldman misled ACA into believing Paulson held an equity stake. The SEC does not have any concrete examples of Goldman telling ACA that Paulson intended to hold the equity stake, though it is implied that as much was said in phone calls and meetings. ACA indicated in a number of documents that it thought Paulson was the equity investor.
Tourre clearly misled investors on the MBS selection process and misled ACA on the involvement of Paulson. However, it is not as clear that he broke the law. Structured credit law is not established enough to give a strong indication of the outcome of this suit. If the prosecution can convince the Jury of the unethical nature of Goldman's involvement, then popular sentiment may overrule the strict interpretation of the law in this case, much to the detriment of Goldman Sachs.
