OneAngryMonkey.com/Blog

Sunday, July 25, 2010

SEC v. Goldman Sachs, Part 2

Who Won this Fight?
The news that the Securities and Exchange Commission had settled its charges of fraud with Wall Street titan Goldman Sachs—coming as it did just hours after the announcement that Congress had given final passage to the massive financial reform legislative package known as the Dodd-Frank Act—seemed to be the government’s attempt to put a cap on all the loose talk in some circles that neither Congress nor the SEC had the stomach to really take on Wall Street.
Still, the early consensus on the Street fight between the SEC and Goldman was that neither side was particularly bloodied, and both could point to good licks they got in. The SEC can point, with some well-worded qualifiers, that the $550 million settlement it wrangled out of Goldman Sachs is, according to Robert Khuzami, Director of the SEC’s Division of Enforcement, “the largest penalty ever assessed against a financial services firm in the history of the SEC.”
Not just that, Khuzami was quick to add, but it was also “a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing.” Hyperbole aside, even SEC critics say that netting a settlement north of half a billion dollars on a $1 billion fraud charge is significant, even if it represents just two weeks worth of Goldman’s annual profits.
Even more precedent setting, however, may be the acknowledgement Goldman included as part of the settlement, essentially conceding that the firm’s disclosure language in the marketing material to its ABACUS products was deficient. While the admission moves Goldman closer to negligence rather than fraud—a deft move for Goldman that might protect the firm from future litigation—it was a more meaningful confession than the SEC’s usual boilerplate of “neither admit nor deny…”.
Goldman also doesn’t have to come under the scrutiny of a corporate monitor, and can immediately start putting this whole episode in the rearview mirror.
As for the SEC, it got the high-profile settlement from a high-profile Wall Street firm that it so desperately needed after years of very public missteps that included dropping investigations of Wall Street honchos, missing Bernie Madoff’s scheme, and fostering a perceived atmosphere of incompetence and inaction.
With the Goldman “win” and the new powers granted to it by the Dodd-Frank Act at its back, the SEC may spend less time now looking in the rearview mirror.

7:12 pm edt

Wednesday, June 23, 2010

SEC v. Goldman Sachs, Part 1

What Does the SEC Want?
Since the Securities and Exchange Commission’s announcement on April 16 of its civil fraud lawsuit against Goldman Sachs, among the preliminary gut reactions by Wall Street watchers was to ask, “What is the SEC thinking?”
The SEC kicked the hornets’ nest when it filed its case against Goldman Sachs, many observers opined, and would soon be stung. The SEC’s complaint alleged that Goldman defrauded certain investors by not disclosing a possible conflict of interest on its specially created “synthetic collateralized debt obligation” (CDO). The instrument, called “ABACUS 2007-AC1”, was related to mortgage investments that eventually went south, according to the SEC’s complaint.
Two weeks later, the Department of Justice said it was reviewing the SEC’s case to see if it warranted a fuller criminal investigation into Goldman’s conduct. Later, both the SEC and the DOJ were reported to be looking into the CDO-selling activities of other major Wall Street firms. In fact, Morgan Stanley is widely reported to be the next target of the expanding investigation.
“It will be interesting to see if Goldman is it, or just the tip of the iceberg,” says one top securities litigator, who asked not to be named for client reasons. “This case may well be very indicative of how the SEC looks at how it handles big banks and the broader problems that led to our current meltdown.” Indeed, much was made about the politics of this case and whether its announcement was timed to boost the chances of the financial reform legislation currently winding its way through Congress. SEC Chair Mary Schapiro publicly defended the SEC’s announcement of the case, saying it had been in the works for months.
Still, that doesn’t mean it’s not political, but just not in the way people may think, the litigator says. “It was political for the SEC not for the broader issue of financial reform,” he explains, adding that after the deserved hits the SEC’s reputation took from missing both the Bernie Madoff case and the red flags that led to the most recent market crisis, the SEC had to show it was willing to tackle investigations of major financial firms and of major importance.
“This is a high-profile case against a big—perhaps the biggest—Wall Street player.”
So, now that Chairman Schapiro has her big fish on the hook—what now? Settle, the litigator advises. “I think the pressure on both sides to settle this case is very big, but more so on Goldman.”
The downside to losing is just so damaging to Goldman, he warns, adding the firm could lose its ability to function and profit in certain markets here and abroad. As for the SEC, he says, it needs to show that it can get a settlement that demonstrates an innovative and unique resolution—and not just on the finite scope of the actual case, but a result that has broader implications. “For the SEC to chalk this up as a win, the public really needs to see a unique, once-in-a-lifetime kind of resolution that indicates real relief and behavior-changing results.”

9:05 am edt

2010.07.01 | 2010.06.01