An article in today's (4/20/10) New York Times on-line edition ("A difficult path in Goldman case") discusses Goldman Sachs's likely defense against the fraud suit against it, outlined in two letters written by the company: "... The letters went on to argue that, contrary to the S.E.C.’s assertions, Goldman disclosed all information about the deal that was material. In particular, the letters drew a sharp distinction between information about the security, which the company said it provided in full, and information about Mr. Paulson’s role.
"The second letter said, 'It is this concrete information on the assets -- not the economic interest of the entity that selected them -- that investors could analyze and use to inform their decisions.'"
"To win its case, the S.E.C. must prove that Goldman was not merely silent about Mr. Paulson’s role but actually gave investors the wrong impression, experts in securities law said."
Implicit here is the idea that the investors' had access to everything that John Paulson knew when he chose the securities in question. Thus, they should be able to judge their value. But the investors did not know that Paulson had chosen the securities exactly because he thought that they were particularly overvalued, compared to other securities he might have chosen. Indeed, the investors did not know which securities Paulson rejected. The question is whether these things could have changed any investor's mind.
From a psychological (not necessarily legal) perspective, such missing information seems relevant. In cases of difficult judgment, people are known to be influenced by the judgments of others, and rightly so. Paying attention to others' judgments often increases accuracy. Thus, knowledge about why Paulson chose the securities should have, and probably would have, influenced the decisions of investors.
I know of no literature on the effect of someone else's rejected choices on judgment. Perhaps the S.E.C. should do (or fund) some psychology research on this point.