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35 Resource Center
In the years I have opined on these pages, I’ve devoted a fair amount of space to the Securities and Exchange Commission. Whether it was critiquing a regime change, calling for a bigger budget or trying to comprehend the regulator’s vacillating stance with regard to adoption of International Financial
Reporting Standards, the commission has served as a rather convenient editorial subject.
But the past 18 months have not been particularly kind to the commission. It has been lambasted for
ignoring more than a decade’s worth of warnings about Bernard Mado; and his company’s consistent
and unrealistic returns, and accused of missing several chances to pursue Texas ;nancier R. Allen Stanford, who is charged with running a Ponzi scheme similar to Mado;’s.
Recently, a scathing 2,000-plus-page report stated that the SEC basically
sat on its hands during a 2008 accounting fraud at Lehman Brothers.
And in a humiliating scandal, it was forced to reveal that a number of
its employees spent more time sur;ng the Web for porn than pursuing
;is is not exactly a track record that instills con;dence as the commission recently ;led fraud charges against Goldman Sachs. According
to the SEC, Goldman structured and marketed something called Abacus
2007-AC1, collateralized debt obligations linked to the performance
of subprime mortgage-backed securities, which, to be kind, could be
labeled as risky. Goldman allegedly didn’t tell investors important information about the CDO, especially that a major hedge fund, Paulson &
Co., had helped select the risky portfolio and then shorted it, in essence
betting that its value would sink.
;e fact that Goldman marketed mortgage-backed securities while
betting that those securities would decline in value was hardly a secret.
Goldman, along with other investment houses, have been doing that for
years. And to be clear, the practice, while arguably vile, is not necessarily
illegal. But what the regulator is charging is that Goldman created and
marketed CDOs that were deliberately designed to fail, so that high-pro;le clients could make money
o; said failure. Goldman, however, contends that it lost more than $90 million on Abacus 2007-AC1 and
earned just $15 million in fees. It also contends that it provided extensive disclosure to clients.
It is against this murky backdrop that the SEC gets an opportunity to mend a tattered reputation and
be taken seriously in its 70-year-old mission statement of being the investor’s advocate.
But already, there have been missteps out of the gate — most notably, a split 3-2 verdict amongst the
commissioners on whether to ;le against Goldman. ;e voting went along party lines, with SEC Chairman Mary Schapiro siding with Democratic Commissioners Luis Aguilar and Elisse Walter. To me, that
signals that the case may not only be roiled with partisan politics, but that the charges may not be as
strong as initially thought.
Either way, Goldman represents what many feel is a make-or-break case for the regulator, with potentially career-altering consequences for Schapiro and her hand-picked enforcement head, Robert
Khuzami. Adding to the SEC’s Goldman headache are a pair of lawmakers who are urging the SEC to
expand its probe of the fraud to determine whether any Goldman-based mortgage securities backed by
American International Group were fraudulently created, thereby rendering the $13 billion in payments
for failed securities made by AIG to Goldman illegal gains.
When Schapiro assumed o;ce last year, she promised a top-down cleanup of the agency. For better or
worse, the Goldman case will serve as a barometer of that progress — or just another blown opportunity
for a agency that cannot a;ord another.
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