SEC cleared in Goldman fraud case
Wednesday, October 13, 2010; 11:48 PM
The Securities and Exchange Commission's internal watchdog Wednesday cleared the agency of accusations that it allowed politics to influence its landmark fraud case against Goldman Sachs but criticized the SEC for violating its own policy by failing to warn the firm of an imminent fraud charge.
The report by the SEC inspector general countered claims made by Republican lawmakers that agency officials may have timed the Goldman case to bolster Democratic-led efforts to pass an overhaul of financial regulation.
But the report also shows that the senior officials paid significant attention to timing the case to maximize media coverage. SEC officials were concerned about Goldman's own press strategy and did not make every effort to alert the bank that a fraud case was being filed, a violation of SEC rules, the report said.
"This report reaffirms that the case was brought on the merits and only on the merits," SEC spokesman John Nester said.
The SEC's lawsuit against Goldman was one of the most prominent legal cases stemming from the financial crisis. In April, the agency accused the storied Wall Street bank of fraud for selling sophisticated European financial firms a complex financial security that was secretly designed to fail.
Goldman at first said it was innocent and complained that the case had taken it by surprise. Later, the bank agreed to pay a $550 million penalty to settle the charges and, without admitting or denying wrongdoing, acknowledged it had made a "mistake" in marketing the security.
Following the the SEC lawsuit, Rep. Darrell Issa (R-Calif.), the ranking member of the Committee on Oversight and Government Reform, and other lawmakers asked that the inspector general investigate whether SEC employees communicated or coordinated with the White House, other lawmakers or Democratic political groups about the suit. Issa requested an expansion of the inquiry after the SEC and Goldman settled the case the same day that the Senate passed financial reform legislation.
The inspector general found that decisions about the case were often driven by concerns about containing leaks before the charges were filed, maintaining a relationship with New York Attorney General Andrew M. Cuomo, and shaping news coverage.
The report shows that in summer 2009, the SEC first alerted Goldman it might face a fraud suit. SEC officials originally planned to file the case in September 2009. But the enforcement staff decided to do more work.
In January, enforcement staff decided they wanted to rush the case when they learned that a probe by a Senate subcommittee could turn up the same findings as their case. But after opposition by Republican commissioners, the case was pulled from the calendar.
By April, the enforcement staff decided to move forward anyway, choosing a date that wouldn't conflict with an announcement in another high-profile case. The case was filed April 16, a Friday.
The inspector general found that the SEC did not alert Goldman about the case until 10:39 a.m. - 10 minutes after the SEC filed its complaint. An official expressed concern that "Goldman is a pretty sophisticated player. . . .[T]hey're good at the public relations game."
Enforcement director Robert Khuzami told the inspector general that he did not think it was a good idea for the SEC to routinely notify entities of pending agency action. But the inspector general's report said this position violated SEC policy, which states: "Every effort should be made to avoid the possibility that defendants first learn of the action when they read about it in the newspapers or when they called by a reporter."
Issa, the congressman whose questions prompted the probe, said Wednesday: "Taking some extra time to address questions surrounding the SEC's decisions is a worthwhile investment that will hopefully help restore the SEC's credibility and the American people's confidence in them."