economics

May 11, 2010

SEC Split on Party Lines Over Goldman Case

Filed under: Uncategorized — ktetaichinh @ 4:30 pm
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One part of Goldman’s defense has been that it lost $90 million in the transaction, arguing that it “surely didn’t wish to structure an investment in which we lost money.” In fact, the firm never intended to buy any of the deal; it just couldn’t sell all the instruments to other investors—hence the loss, say people familiar with the matter.

Goldman, which denies any wrongdoing, sought to downplay the case Monday. In a voice-mail message to employees, Chief Executive Lloyd C. Blankfein described the “core” of the SEC case as an “allegation that one employee misled two professional investors.” Fabrice Tourre, the 31-year-old Goldman trader at the center of the suit, went on paid leave “with no end date,” the firm said.

Goldman’s board met Monday and remains firmly behind Mr. Blankfein, according to people familiar with the matter.

On Tuesday, SEC Chairman Mary Schapiro is likely to get a grilling over the internal dissent when she appears before the House Financial Services Committee for scheduled testimony.

People familiar with the vote said Ms. Schapiro—a registered independent—joined two Democrats on the commission, Elisse Walter and Luis Aguilar, in supporting the fraud case against Goldman. The two Republican commissioners, Kathleen Casey and Troy Paredes, were opposed, they said. The commissioners didn’t respond to repeated requests for comment.

In recent years, splits on high-profile enforcement cases have been rare. Ms. Schapiro, appointed by President Obama, told the Journal in January that the agency in her tenure has voted unanimously “north of 90%” of the time on enforcement cases. The agency has split more frequently on the rules it passes to regulate the industry and corporate disclosures.
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SEC officials said the agency followed standard practice in the case and called the timing unrelated to external events.

There have been skirmishes in past Wall Street cases over the input of SEC commissioners. In 1994, the SEC filed civil administrative proceedings against three former executives at Kidder, Peabody Group Inc. after a bond scandal at the firm.

Two of the executives argued that the SEC improperly filed the case without a quorum of commissioners. It was the first time in SEC history that it filed a major civil administrative case with a vote of just two of its five commissioners. An SEC administrative law judge rejected the argument and the case proceeded.

Democrats have been citing the SEC’s action against Goldman to press the case for their financial overhaul. Republicans said the Democrats’ plan for new financial rules would only make it easier for big banks that run into trouble to secure government bailouts in the future.

Mr. Paulson’s bipartisan support for politicians points to the difficulty both parties face as they try to use the case against Goldman for political gain. Goldman was charged last week by the Securities and Exchange Commission with civil fraud relating to its trading in mortgage-related investments.Since 1989, Goldman’s political action committee and its employees ranked second among corporate donors to AT&T Corp. in total campaign donations—$31.6 million.

Nearly two-thirds of the money has gone to Democrats, making Goldman the largest corporate source of campaign donations to Democrats. The firm is the fourth-largest donor among companies to Republicans. Goldman has also sent a stream of top executives to Washington, including Clinton Treasury Secretary Robert Rubin and Bush Treasury Secretary Henry Paulson.

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