Goldman v. SEC: The Settlement Talks Begin

Settlement talks have apparently begun.

Those who believed that Goldman would fight to the bitter end in its case against the SEC were either  engaging in wishful thinking or were unaware of the dynamics of securities litigation with the Commission.  First, irrespective of what one thinks of the case, the SEC had a potent issue in alleging that Goldman failed to disclose the participation of a short seller in the selection of the reference portfolio.  Goldman's defense, among others, was to argue that sophisticated investors knew what was in the reference portfolio and didn't need to know that the short seller helped select the securities. 

Many wanted to believe in the viability of the defense.  Its consistent with a philosophical view that large investors don't need to be protected, that they can assess the risks without government intervention.  Its a variation of let the market resolve things.  Of course, if that were true, there would be no need for any protections of the securities laws, at least with respect to sophisticated investors.  With the Goldman hearings a few weeks ago discussing practices in CDOs such as barbelling and the use of stated income loans, the idea that buyers would protect themselves (that they could uncover these practices) was becoming increasingly untenable.  

So Goldman was in a position, for all of the bluster, where it could easily lose the case.  A settlement offers a number of advantages.  First, the SEC typically allows settling parties to neither admit nor deny that they violated the securities laws.  This prevents the settlement from having significant value in private litigation.  If the case went to a verdict, it would strengthen the hand of those bringing private suits.

Second, the SEC has its own reasons for wanting to settle (it could still lose) and so Goldman at this point has maximum leverage to get the lightest possible settlement.  This means two things.  First, it will try to avoid a settlement that admits to fraud under Rule 10b-5.  There are other provisions in the securities laws such as Section 17 of the 1933 Act which would allow Goldman to accept a disclosure violation but not one that amounted to fraud. 

In addition, Goldman will want to negotiate intensely over the amount of any fine or penalty.  These amounts are not set in stone.  The SEC will want an amount that will send a message that it is punishing Goldman but there is a wide range that can accomplish this result.

Settlement talks will go on for awhile.  But they will continue and the case will settle.

Comments

[Bill McSweeney]

The most creative solution for Goldman and the SEC: Consider----to impress the public the settlement number has to be BIG. After all this is a company that gave 15 billion (or more) in bonuses last year. The public well knows that number. So...how does the SEC get a BIG number from Goldman when both sides know the case is a coin toss ? They agree to "settle" with a positive public benefit they can both brag about. How ?Goldman agrees to a BIG number (maybe 5 billion?), BUT, not to a "fine" or "violation". They are not deemed to be "fined" (although they agree to pay), however, by agreement, Goldman openly concede that ALL licensed brokers require major ethics training. The Goldman settlement money per the agreement, establishes a perpetual endowment (maybe 5 Billion) to forevermore provide ethics training etc. to ALL U.S. securities brokers. 5 Billion would generate 200 million a year to fund this trainig. Result: the Government could brag about obtaining this giant fund to use towards CLEANING Wall Street (at Goldman's expense), and Goldman could claim "we did not violate the law", BUT do believe American's deserve a more open and honest Wall Street---and WE WILL PAY FOR IT. Although largely a PR show for both sides--it would likely meet both organizations political, business, and legal needs. I think this could work. Bill