SEC sued Goldman Sachs to break an impasse
Tuesday, April 20, 2010
For months, Goldman Sachs and the Securities and Exchange Commission had been involved in secret talks over allegations that the Wall Street bank defrauded customers in selling them investments designed to fail.
Then, after a crucial meeting last month between lawyers for Goldman and the SEC, the agency came to a fork in the road. Even after SEC lawyers had told Goldman in writing they were prepared to file a federal suit, the firm gave no ground, declining to ask for a settlement, according to three people familiar with the case. The agency could prolong negotiations in hopes of reaching a deal Goldman would accept, as the SEC had often done in previous cases, or take the bank to court.
Endorsing the recommendation of investigators, the SEC's five-member commission voted 3 to 2 to proceed with the civil suit, taking a high-stakes gamble that pits Wall Street's top regulator against its most storied bank. The case, filed Friday,
has provoked a counteroffensive from Goldman, which says it was blindsided by the suit. Goldman's defenders are suggesting that the suit may have been designed to help make the case for the Obama administration's push this month for legislation to overhaul financial regulation.
SEC officials say that they told Goldman last summer the agency would probably bring action, and that the bank did not show any contrition. At the same time, they say they wanted to use the Goldman case to make a broader statement about the agency's renewed intention of holding prominent financial firms accountable for misconduct.
Neither SEC officials nor Goldman executives would discuss the internal dynamics of the case on the record. But people in both camps were preparing Monday for an epic court battle that could offer a chance for both sides to restore their reputations after they were sullied during the financial crisis.
Victory for the SEC, Wall Street's top regulator, would help restore credibility after it was sharply criticized for not aggressively enforcing securities laws. Victory for Goldman could help the firm answer critics who allege it epitomized the excesses that led the financial sector into its worst crisis in decades.
On Monday, the case reverberated around the world. Financial regulators in London and Germany said they would open investigations to see if Goldman's sale of mortgage securities broke local laws.
Goldman's domestic legal troubles could be compounded abroad as foreign regulators open probes into the investment. London's Financial Services Authority and Germany's BaFin regulatory agency said Monday that they were coordinating with the SEC. The Royal Bank of Scotland lost an estimated $850 million and the Duesseldorf-based IKB Deutsche-Industriebank lost more than $100 million on mortgage-related securities set up by Goldman. [Story, A7.]
The SEC's suit centers on a development central to the financial crisis: the creation of exotic investments that allowed firms to bet on the direction of the housing market.
The suit asserts that Goldman defrauded investors when it sold them a subprime-mortgage investment in 2007 that was secretly designed to lose value. The agency alleges that Goldman created and marketed the investment without telling its clients that Paulson & Co., a prominent hedge fund, had helped the bank assemble the investment while at the same time was placing bets that it would lose value. The bank received $15 million from Paulson & Co. for its services.
Goldman has denied the allegations, releasing three statements since Friday rebutting the SEC's points.