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SEC must stand ground on Goldman Sachs case

Goldman Sachs, which has been accused of civil fraud over its dealings in subprime mortgages, is apparently looking to play “Let's Make a Deal” with the SEC to reduce the charge before any settlement is reached.

Goldman Sachs, which has been accused of civil fraud over its dealings in subprime mortgages, is apparently looking to play “Let’s Make a Deal” with the SEC to reduce the charge before any settlement is reached.

The Securities and Exchange Commission needs to stand its ground. By maintaining the fraud charge in this serious case, the regulator will send a very clear message to Wall Street that the latter is not above the law.

SEC officials have publicly stated that they are making it their central mission to determine whether the types of shenanigans that took place at The Goldman Sachs Group Inc. also occurred at other firms or if they were isolated incidents.

While Goldman has become a symbol of Wall Street greed, many industry observers believe that its alleged shady dealings are just the tip of the iceberg. It is likely that there are other players who had their hands in similar deals. It’s for that reason the regulator cannot waver as it continues legal action related to the mortgage meltdown that plunged the country into a recession.

The SEC needs to show that it means business and will do everything in its power to protect shareholders. If it fails to deliver, it’s up to the courts to stay strong and keep the SEC in check.

Don’t forget that the agency was publicly rebuked by a federal judge in New York for levying an insignificant fine on Bank of America Corp. for disclosure issues pertaining to its takeover of Merrill Lynch & Co. Inc.

In that case, Judge Jed S. Rakoff of the U.S. District Court for the Southern District of New York rejected a proposed settlement between Bank of America and the SEC under which the bank would have paid $33 million to settle charges that it lied to shareholders about its acquisition of Merrill Lynch.

Instead of doing what industry observers expected and rubber-stamping the deal, the good judge delayed his decision and, in doing so, raised questions about the SEC’s resolution policies.

Let’s hope that the judge’s two-by-four to the head of the SEC actually got its attention and that it will no longer agree to soft settlements such as the kind Goldman is seeking.

It’s my hope that Mr. Rakoff’s decision serves as a model for other judges when they are presented with similar watered-down settlements in cases where investors and shareholders have been lied to or misled.

The SEC needs to take this all into account as Goldman’s lawyers arrange meetings to negotiate a settlement on lesser charges.

A weak deal could result in a fine of hundreds of millions of dollars, versus what some in the industry estimate could be in the billion-dollar range.

Of course, negotiating a lesser charge in fraud cases is not unusual. From Goldman’s standpoint, it would reduce the risk of the firm’s being involved in a lawsuit with its investors and avoid the further damage that settling a fraud charge would do to the reputation of the Wall Street powerhouse. Avoiding a fraud charge would also likely help lift Goldman’s stock, which has been battered since the lawsuit was announced.

However, the SEC needs to understand that reducing the fraud charge could trigger criticism of the agency as having backed down from Wall Street’s most profitable bank. While Goldman has repeatedly denied any wrongdoing, many industry analysts believe that the company will agree to a fine and other penalties in order to resolve the suit, which was filed April 16 in U.S. District Court in New York.

SEC Chairman Mary Schapiro has publicly stated: “The SEC needs to send a clear message that corporate wrongdoing will not be tolerated, and penalties for securities violations will be stiff.”

She now needs to back up those words.

Jim Pavia is the editor of InvestmentNews.