When I first wrote about the case against Goldman Sachs for fraud on Friday I said that my reaction was “largely positive” as fraud was a major factor in what led to crisis and it is high time regulators started to acknowledge this.
Nonetheless, from my vantage point. The Goldman case is a politically-charged one because there are a number of political and tactical advantages to this particular case. Let me review some of them.
It is no coincidence that this is a civil case instead of a criminal one. When the Obama Administration went after the Bear Stearns hedge fund managers Cioffi and Tannin who blew up in July 2007 via the Brooklyn US Attorneys office, the defendants were acquitted. This was a black eye for the Administration. Here was a Democratic Administration conducting bailouts of Wall Street, allowing the firms to post record profits and reward themselves massive bonuses even as they benefitted from government largesse. And yet, in the only significant criminal case they brought against alleged wrongdoers, they lost. Americans simply don’t understand this. Their anger will be felt at the polls.
So, the Obama Administration can use this Goldman case as a Trojan horse for discovery both at Goldman and at other firms. You have already heard that the Merrill – Magnetar scheme was identical to this one. Rabobank*, a Dutch bank, is claiming that Merrill defrauded them in the exact same way that Goldman is alleged to have defrauded ABN Amro and IKB.
As we know from the O.J. Simpson proceedings, a civil case merely needs to meet the ‘preponderance of evidence’ threshold and is a far cry from the ‘beyond a reasonable doubt’ bar set in criminal trials. It is easier to get a favourable outcome and pass the discovery from this case to the US Attorneys as a foundation for a criminal proceeding. This tactic also gives Congress a green light to go on a fishing expedition at Goldman and elsewhere on Wall Street if they so choose.
From a political perspective, the Obama Administration can use Goldman as a whipping boy to demonstrate their populist bona fides to the electorate. Remember, people are still angry about the bailouts. I have long felt the healthcare debate was damaged by this. Had the Obama Administration not bailed out the banks and allowed them to return to business as usual, they might have received a more favourable reception from the electorate on healthcare and other issues.
But, at a minimum, the President can use this case as leverage in the debate over financial reform i.e. “if you banks don’t back off and stop lobbying against reform, we will use this as a Trojan horse to go after all of you.”
As for Paulson, the firm may not get off scot-free. Simon Johnson goes into a bit of this:
John Paulson was not the trigger man – it was Goldman and its executives who withheld adverse material information from their customers. But if the entire scheme was Mr. Paulson’s idea – if he was in any legal sense the mastermind (obviously he was, but can you prove it beyond a reasonable doubt?) – then we are looking at potential conspiracy to commit fraud. And if he had conversations of any kind and at any time during this period with top Goldman executives, this will become even more interesting – so of course all relevant phone records will now be subpoenaed.
So, is it a coincidence that Goldman was the first case and that it was a mid-level employee who is the only one against whom charges are filed?
I think not. It gives the SEC (and Obama) a lot of leeway in how to proceed later against Goldman and other firms using the same practice. This case is a good one from a political perspective.
On the other hand, as Johnson says, prosecutors and private companies will almost surely look to get Paulson (and Magnetar) on conspiracy because it is almost always the cover-up that creates culpability rather than the original crime. And I bet the evidence uncovered in discovery will be fascinating to read as the fabulous Fab has already demonstrated.
SEC rule 10b-5 on fraud – Wikipedia
*Note: an earlier version of this post erroneously referred to Rabobank as Robeco.