Goldman Sachs: Any Settlement Will Likely Be Decimal Dust to Them

The Wall Street Journal ran an excellent story earlier this week about how the SEC is trying to bury one of its many screw-ups by trumpeting its civil suit against Goldman Sachs (GS) – which will no doubt result in an out-of-court settlement that will represent decimal dust to Goldman and provide no disincentive whatsoever from engaging in the same sort of act tomorrow and the next day. Excerpts below…

…Last Friday, the same day that the government unexpectedly announced its Goldman lawsuit, the SEC's inspector general released his exhaustive, 151-page report on the agency's failure to investigate alleged fraudster R. Allen Stanford… The report is damning for an SEC that wants the public to believe it has turned the corner after the Bernie Madoff disaster…. [Spencer Barasch is] the SEC enforcement official who sat on various referrals to investigate Allen Stanford and then, after leaving the SEC, performed legal work for… Allen Stanford.

…In the Stanford case, we see numerous SEC insiders over many years urging—at times begging—the enforcement staff to take action, to no avail. The examination staff at the SEC's district office in Fort Worth, Texas reviewed the Stanford Group's operations in 1997, concluded that its sale of certificates of deposit likely constituted a Ponzi scheme, and referred the matter to SEC enforcement staff… SEC examiners investigated again in 1998, 2002 and 2004. Each time, they concluded that the Stanford operation was a probable Ponzi scheme and urged SEC action. Each time, the enforcement staff failed to act.

Along the way, SEC enforcers also ignored warnings from the daughter of an elderly investor in the Stanford scheme, the Texas State Securities Board, an anonymous insider in the Stanford operation, and U.S. Customs, which suspected that the Stanford organization was laundering money. The SEC at times would open preliminary investigations. When the Stanford Group declined to provide information, the inquiry would end.

Particularly tragic is that almost all of the $8 billion that Mr. Stanford collected from investors was gathered after the SEC's first round of inquiries, so if SEC enforcers had acted on the first referral from their colleagues, this alleged fraud would be measured in millions of dollars, not billions. Later, some investors increased their investments with Stanford Group after they learned that the SEC had investigated in 2005 and took no action. They viewed it as a clean bill of health.

…SEC IG David Kotz asked the enforcement staff how it could possibly have failed to prosecute someone who was believed by so many others to be running a fraud. The staff told him that senior SEC management did not favor the pursuit of Ponzi schemes and other frauds that were difficult to investigate and time-consuming to prosecute... Why do the painstaking work of tracking down actual criminals when you can score favorable headlines with a drive-by lawsuit against a large public company that will have a strong incentive to settle quickly?

I see the SEC action as being nearly as smarmy as Goldman was in pouring this pile of steaming...mush... onto unsuspecting investors. It allows them to ally themselves on the side of public sentiment while, in fact, accepting the usual token from their pals on Wall Street rather than pursuing the criminals whose frauds (in the SEC’s own words) “were difficult to investigate.” And here I thought that was their job…