Daniel Dravot, Goldman Sachs, and the SEC

While I may criticize the motivation and timing of the SEC's case, I applaud the long overdue recognition by Wall Street's regulators that they have coddled the mighty and powerful for far too long.
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In Rudyard Kipling's novel The Man Who Would Be King, we are introduced to Daniel Dravot and Peachey Carnehan, perhaps best described as 19th Century con men and adventurers who managed to become Kings of the Kafirs. At one point, Dravot managed to convince his followers that he was a god -- a descendant of Alexander the Great -- which, if you think about it, is far better than a mere king.

Alas, Dravot and Carnehan should have left well enough alone. When Dravot decided to marry a Kafir girl, she bit him when he tried to kiss her. Unfortunately, Dravot bled from the bite. Gods do not bleed.

Seeing that Dravot was "Neither God nor Devil but a man!" his followers abandoned him. Dravot walked out upon a rope bridge high above a gorge, bedecked with his crown, and the rabble cut the rope cords. Dravot fell to his death. Carnehan was crucified but allowed to live when he survived through the day, only to eventually die a lunatic and a beggar.

As the drama of SEC v. Goldman Sach & Co. unfolded three months ago, I was asked if I thought that Goldman would survive. Oddly, I could not help but think about Dravot.

Goldman is not a mere mortal king but has been viewed in some circles as a god on Wall Street. Unfortunately, when Goldman kissed Paulson, the latter bit and the former bled; and now Goldman is astride the rope bridge, bejeweled and crowned but imperiled as the SEC hacks away.

Months ago when this case was filed, I didn't think that Goldman would die a tortured death, but I did predict that the would-be God-King of Wall Street was not coming off that bridge with its crown.

My opinion in April 2010 was that if Goldman fought the SEC case in court, the negative publicity would be disastrous. That could well be the first snap of twine over the gorge. If Goldman settled with the SEC, it would be damaged and hamstrung by whatever undertakings would be imposed. Clearly, this majestic deity has publicly shed its own blood and revealed itself as something far less than what it once was. There's just no going back from that.

While I may criticize the motivation and timing of the SEC's case, while I may criticize the integrity of the Complaint and the allegations contained therein (See, SEC v. Goldman Sachs: Regime Change or Crowd Control? / April 18, 2010), I do not criticize - I applaud - the long overdue recognition by Wall Street's regulators that they have coddled the mighty and powerful for far too long. There is nothing alleged in the Complaint that Goldman or any of the parties and participants should point to with particular pride. It is back-stabbing and double-dealing, no matter how permissible those acts may legally have been. The simple fact that you can do something is not, in and of itself, a compelling reason to do it. That is why we talk of ethics and morality in the marketplace-- as alien as those concepts may be in the world of business.

Perhaps now, with the public permitted this rare glimpse behind the curtain, others will better understand my long ignored cries for reform. The practices exposed in SEC v. Goldman are not shocking or surprising to most industry veterans. We have long seen Wall Street's cops look askance. We are used to the disparate treatment afforded the big boys versus the small fry.

As to the terms of the Goldman settlement, all is not what it seems or what is described to us by the SEC. In the preamble to the Proposed Judgment, the equivocation is clearly set forth:

[D]efendant Goldman, Sachs & Co. ("Defendant" or "Goldman") having entered a general appearance; consented to the Court's jurisdiction over Defendant and the subject matter of this action; consented to entry of this Final Judgment without admitting or denying the allegations of the Complaint (except as to jurisdiction); waived findings of fact and conclusions of law; and waived any right to appeal from this Final Judgment

If you missed the fancy side-step there, let me point it out: "without admitting or denying the allegations of the Complaint . . ." True, that is boilerplate language in all such settlements but this isn't exactly a boilerplate lawsuit. Goldman isn't saying "yes" and isn't saying "no."

Moreover, read Paragraph 3 of the Consent:

Goldman acknowledges that the marketing materials for the ABACUS 2007-ACI transaction contained incomplete information. In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was "selected by" ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson's economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure.

While you may think you understand what Goldman acknowledges, I'm not sure that most folks appreciate the artfulness of this dodge. Goldman acknowledges that the ABACUS marketing materials were incomplete. Do you see anything that says that they were fraudulent? Do you see anything that says that Goldman distributed the materials in a fraudulent manner? Hmmm . . . I didn't think so. What Goldman does consent to is the characterization that it made "a mistake." Goldman also regrets that its marketing materials were incomplete.

Imagine that a dapper Mr. Singer is charged with murder. Imagine that instead of going to jail, I settle for a few bucks -- okay, a lot of bucks, whatever. Imagine that when I stand before the Court to express my guilt (we lawyers call that an Allocution), that I say that I acknowledge that allowing the bullet to project from the gun in my hand into the deceased's body was a mistake and that I regret that the victim died of lead poisoning from the projectile. When you're done laughing, at least admit that you get my point.

As to whether the $550 million or so dollars that the SEC has extracted via fines, penalties, and disgorgement from Goldman is a significant sum, well, that's a tough question which requires a nuanced answer. Of course a half a billion dollars is a lot of money, unless we're talking about the federal budget. On the other hand, all that I keep thinking about is that on April 16, 2010, the day when the SEC announced its lawsuit against Goldman, that Goldman's stock lost $10 billion in value. So, in one trading day the common stock's value fell nearly 20 times what the SEC is citing as a major financial sanction. Of course, what I'm still puzzled by is how hammering public shareholders with a financial penalty sends a message to the executives and board members who acted improperly or failed to act. After all, Goldman Sachs is a publicly traded company whose shareholders will ultimately pay the cost of this settlement and who incurred the diminution in their investment.

And, while we're at it, will someone explain to me how Fabrice Tourre is still left hanging out there as a Defendant? Is his head the promised payment to some SEC Salome?

Ah, but why raise such concerns when we're all used to tackling these complex cases in simplistic ways?

Goldman has walked itself out on the bridge. I have no pity for the mighty firm's predicament. If only we could send some of Wall Street's regulators onto that same span.

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