As most know by now, the SEC sued Goldman Sachs alleging that the bank created and sold “synthetic” collateralized debt obligations, CDOs linked to subprime mortgages without disclosing to buyers that hedge fund Paulson & Co. helped pick the underlying securities and bet against the vehicle. Goldman is strongly disputing the SEC’s allegations.
Business Week notes the Goldman Sachs Suit May Prompt Wider Probe, Regulation. “This is probably just the tip of the iceberg,” said Chizu Nakajima, director of the Centre for Financial Regulation and Crime at Cass Business School in London. “As far as other financial institutions are concerned, they are obviously very worried. If the SEC’s action is actually successful, it could well open up the gates to other litigation worldwide.”
There’s been a raft of coverage. One of the best summaries I’ve seen is Goldman Sachs vs. SEC: All You Need To Know (Latest UPDATES) on the Huffington Post. However, boardmembers of Goldman Sachs and other vulnerable banks are advised to read Wall Street beware: the lawyers are coming, by Frank Partnoy, FT.com, 4/19/10 and The Goldman Sachs Board and the SEC History at The Bloxham Voice, 4/19/2010.
Lynn Turner, the former SEC chief accountant, and Frank Partnoy, author of the The Match King have published Off-Balance Sheet explaining how Congress could reform this area with one simple paragraph requiring that financial statements reflect reality, and by empowering lawyers to enforce that requirement after the fact.
Bloxham notes that in April 2003 the SEC settled with Goldman over conflict of interest charges. Goldman was permanently enjoined “from violations of NASD and NYSE rules pertaining to just and equitable principles of trade (NASD Rule 2110; NYSE Rules 401 and 476), advertising (NASD Rule 2210; NYSE Rule 472), and supervisory procedures (NASD Rule 3010; NYSE Rule 342).” NYSE Rule 472 which begins:
Each advertisement, market letter, sales literature or other similar type of communication which is generally distributed or made available by a member organization to customers or the public must be approved in advance by an allied member, supervisory analyst, or qualified person designated under the provisions of Rule 342(b)(1).
What was the level of supervision in the most recent example? This is a question the Goldman Sachs board will need to address. Bloxham then proceeds to go through several other requirements in a similar manner. Boards would be advised to go through the same exercise.