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July 19, 2010

The SEC’s strike suit against Goldman

GoldmanSachs-SEC-071510As noted in April when the Securities and Exchange Commission brought its lawsuit against Goldman Sachs, the case was destined to settle with Goldman paying a hefty settlement, which the SEC announced last week. But Larry Ribstein expands on that thought in this timely post on what the proposed settlement means to the folly of the current reform movement regarding governmental regulation of financial firms:

The SEC is heralding the $550 million settlement in its suit against Goldman as “the largest penalty ever assessed against a financial services firm in the history of the SEC,” and “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.” Surely the agency had a strong incentive to try to use the Goldman settlement to obscure the memory of Madoff, Stanford and the Bank of America settlement. Meanwhile,today’s NYT concludes its Goldman story with a quote suggesting Goldman got off lightly.

The truth is far more disturbing: the SEC got a big payday in what would have been seen as a strike suit had it been a private securities class action lawyer. [.  .  .]

What clues on all this can be gleaned from a settlement that involves a huge amount of money but only an admission of a “mistake”?

The bottom line is that this suit has proved to be no more than a common “strike” suit, no better than the sort of private securities class actions that triggered Congressional reform 15 years ago. Instead of attorneys’ fees, the SEC’s objective appears to have been purely political. In the end it extracted a ransom payment from Goldman so the firm could reclaim its reputation and get back to business.

The court must now review the settlement. It should take a cue from the dissenting Commissioners and reject it because of the puzzling and troubling inconsistency between the amount of the settlement and Goldman’s meaningless admissions. The SEC should have to prove exactly what Goldman did wrong. This will force Goldman to either litigate or make a meaningful settlement. Goldman is hardly an object of pity at this point. In any event, the issues here go far beyond Goldman to, among other things, the proper role and function of the SEC.

It is sad that the SEC not only cannot be trusted to find fraud, but that it can no longer be trusted to litigate and settle cases involving the supposed frauds that it finds. But this is where we find ourselves in the days following “financial reform.”

Expecting the SEC to regulate a firm as sophisticated as Goldman Sachs effectively is about as rational as investing one’s entire nest egg with Bernie Madoff or Allen Stanford.

Posted by Tom at July 19, 2010 12:01 AM |

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