Why Goldman Sachs is going down

Barry Ritholtz sez,

I have been watching the press coverage of the SEC litigation vs Goldman Sachs with a mixture of awe and dismay some of the really bad analysis, sloppy reporting, and just unsupported commentary about the GS case. I put together this list based on what I know as a lawyer, a market observer, a quant and someone with contacts within the SEC. Out of the 10, here are 2 examples:

2. Robert Khuzami is a bad ass, no-nonsense, thorough, award winning Prosecutor: This guy is the real deal -- he busted terrorist rings, broke up the mob, took down security frauds. He is now the director of SEC enforcement. He is fearless, and was awarded the Attorney General's Exceptional Service Award (1996), for 'extraordinary courage and voluntary risk of life in performing an act resulting in direct benefits to the Department of Justice or the nation.'

When you prosecute mass murderers who use guns and bombs and threaten your life, and you kick their asses anyway, you ain't afraid of a group of billionaire bankers and their spreadsheets. He is the shit. My advice to anyone on Wall Street in his crosshairs: If you are indicted in a case by Khuzami, do yourself a big favor: Settle.

3. Goldman lost $90 million dollars, hence, they are innocent: This is a civil, not a criminal case. Hence, any mens rea -- guilty mind -- does not matter. Did they or did they not violate the letter of the law? That is all that matters, regardless of what they were thinking -- or their P&L.

What the Media Misniformed You About the SEC vs Goldman Sachs Case (Thanks, Barry!)

• [Anonymous]

  The SEC is the same outfit that was supposed to protect us from crooks like Bernie Madoff.

  Nuff said.

• [Pantograph]

  Cory as much as I agree with you, and even though we never met I want to ask you as a friend to lay off the espresso for a bit. You’re getting quite manic lately.

• [eander315]

  #10 on the list was the most spot-on commentary I’ve heard from anyone covering this mess. It’s really annoying that anyone with a 401K feels qualified to spew rhetoric that more often than not is actually based entirely on political standing.

• [arkizzle / Moderator]

  Wait.. I thought all lawyers were quants? I may have the spelling wrong.

  • [Felton]

    Good one. :^D

• [Anonymous]

  As far as bad reporting goes, I think number 7 in his list is the key; its almost as if the media is saying “don’t try and follow the story, because you won’t understand it.” I think it reveals the structural biases of American journalism, regular people commit regular crimes, but in their eyes elite people commit elite crimes.

  Poor people commit complicated crimes as well, say a man stealing a pizza using an elaborate system of fraudulent checks and identity theft, because childhood abuse and lifetime poverty trained him in both urban survival and flexible morality. Every bit as complicated as a obscenely wealthy investment banker sees a way to defraud his clients by hiding the true value of the investments he’s selling in order to gain a windfall when everyone but him goes the other way on the investment.

  Even if it were complicated, it’s the press’s duty to inform us about important issues, no matter how complicated (which this issue isn’t.) I agree with Ritholtz, this is a simple fraud case, nothing complicated about that.

• [Anonymous]

  He’s basically correct. The reportage and reaction around this has been awful and mostly misses the points. That said, he’s missing the point that this is a political case brought for some political reasons. I have a few guesses as to what/why but they’re just SWAGs.

• [Anonymous]

  I am presently in litigation with Fremont Reorganizing, Goldman Sachs dba Litton Loan Servicing, et al., (2 different cases) for about 2 years now. The main issue with the complaint is a fraudulent loan originated by Fremont in June 2006. This in turn produced an array of other
  issues: unsigned deed of trust, over billing issues, lost payments, excessive balloon payment, back dated assignments, illegal non-judicial foreclosure documentation, missing documentation, illegally reporting to my credit, falsifying declarations, 6 week TRO’s, court procedures not followed, judges wait until the courtroom is cleared to rule against a TRO (both times); retired (78 year old) judge ruled against a seated judges TRO where the retired judge took 30 minutes to read a 300 page brief. The whole time they have been ignoring my request and failing to give me the required documentation so that I can rescind the loan. Goldman Sachs dba Litton Loan Servicing has been aggressively trying to foreclose on my property. I believe to cash out for insurance reasons. (It’s over a million dollar loan) I have invested over $400,000 into this property for the past 5 years and if I had known about this mortgage meltdown game played by Wall Street I would have never proceeded with this Real Estate transaction. The Media and the Government has not once addressed or helped the borrower, namely me, who also has been damaged by these defaulted CDO’s.

  A Time line of what’s going on with Goldman Sachs to show how they are scheming to pursue foreclosures for the insurance by acquiring distressed, shelled fraudulent companies which will eventually or haven’t already gone BK…

   Oct 26, 2005 Litton Loan Servicing Class Action – mishandling loans, servicing over 400,000 borrowers – case settled Feb 17, 2009 for $537 (limited due to class status)
   Feb 27, 2007 FDIC Cease and Desist – Fremont Reorganizing for illegal loan practices, et al., (largest predatory lenders who heavily solicited brokers for their schemes)
   Oct 16, 2007 Massachusetts Lawsuit vs Fremont and Goldman Sachs – Predatory Lending Practices – settled May 11, 2009 for $60 mil
   Dec 11, 2007 – Goldman Sachs Acquires Litton Loan Servicing
   June 2, 2008 Litton (Goldman Sachs) Acquires Fremont Reorganizing Servicing Rights
   June 19, 2008 Fremont Reorganizing files BK
   Apr 16, 2010 – SEC vs Goldman Sachs – Securities Fraud

  Here is the link to my blog http://bushnellcomplaint.blogspot.com/ if you want to download court documents pertaining to my case.

  Note: My wife is pursuing individuals who are interested in joining her in a class action lawsuit with regards to violation of her community property rights in a wrongful foreclosure. If you are in a community property state and a spouse is not on title you may have grounds for legal action.

• [bardfinn]

  The SEC usually settles cases because corporations aren’t actually individuals (usually). There are investors who do not deserve to see their investments disappear because the corporation or its officers were convicted of crimes, and the corporation collapses into bankruptcy, when there exists no hard-and-fast evidence of wrongdoing on the part of the officers or no reasonable suspicion of future wrongdoing if the officers are allowed to continue to operate with appropriate controls in place. Shareholders can operate under their charters to replace officers they don’t like.

  Of course, that would require the officers in question to demonstrate a lack of profitability.

• [Anonymous]

  On the whole failure a year or so ago–wasn’t the guy in charge of the Federal Bank in New York responsible for making sure the companies on Wall Street followed the laws? If so, shouldn’t he be prosecuted for falling down on the job? And if so, couldn’t Obama find someone else to be the Secretary of the Treasury?

  And the SEC being worth their weight in salt? With the reports of the management team there spending too much time looking at porn, I don’t hold them in much respect. If you are going to look at porn, do it at home-not on company time (in this case, on our money, too).

• [lifeofideas]

  If you want to just clean house, I’m pretty sure the SEC has some “character and fitness” requirements, and they could just ban a lot of these individuals from any Wall Street work. As for crimes to prosecute, there’s a lot to work with here. Fraud has both civil and criminal versions. There’s wire fraud (you think they never mailed anything?). And you can look into other laws, like violations of various (non-penal) statutes, tax laws, and such. On the civil side, clear breach of fiduciary duties, gross negligence, and almost certainly enough malice or indifference to consequences to justify punitive damages. In this case it’s a stretch, but some states have laws that have special penalties for defrauding or harming the elderly (pension funds, right?) (Too much of a stretch?) As for settling, I imagine one reason to settle is to “get results” before the next cycle of elections. On the Goldman side, they want to get back to making money, so will settle to put this distraction behind them. I _wish_ the feds would treat the whole thing like an organized crime (or drug dealing case), and get the Goldman employees to spill their guts so you could get as big a clean-up as possible, and maybe even figure out exactly what new laws (including penalties) need to be on the books.

• [bardfinn]

  Also, paradoxically, I find that I am bound to note that I am not a lawyer.

  I am also (infamously) not cowed by arguments to the man or to the qualifications of the man. Point #10 is better phrased (without the censoriousness) as “Don’t hold strong opinions about things you don’t understand.” – lack of which is what got everyone into this mess.

• [Brainspore]

  Goldman lost $90 million dollars, hence, they are innocent

  The individuals making these deals got millions in fees. It matters little to them that the company loses money so long as they still get to make out like bandits.

  • [neward]

    that required some rereading for me, he’s saying that’s a red herring. It’s a bit confusing because some of the phrases he italicizes are false claims and red herrings he refutes and other are points he makes.

    Definitely worth reading the whole article. I’m glad to see the SEC is stepping up their enforcement. There should definitely be some people tried for nonfeasance for the past decade, although they haven’t had the staff to enforce the law and the staff they had was looking at other things on the internet apparently.

    I’m glad the Barry Ritholtz stuff is posted to Boing Boing once again, it’s nice when blogs you follow collide.

• [jdk998]

  Great article. I agree wholeheartedly with point #9 made by the author. The media is spinning this politically, as that sells copy and gives the talking heads something to spew about. The underlying SEC claim, violation of Rule10b-5, is a fairly standard rule that public companies have to follow. Violate it and suffer the consequences in a court of law.

• [Anonymous]

  So you’re selling short on Goldman, eh?

• [bklynchris]

  @Anon post #3

  OMG!!!!!!!!!!!!!!My observation and opinion exactly!!!!!!!!!!!!!I went to his blog and half way through his column, I thought, wait a minute-you are a lawyer, a quant and a market observer, with friends in the SEC? Journalist my ass, you my friend, as defined by your own description, either run your own hedge fund or are a highly paid consultant to one who does not want to get caught up in the trolling nets that Congress is slowly knitting.

  Tell me you WON”T buy a single share of GS stock in this period of time and I will take your freaking bet! The Hedge fundies (also know as Satan’s minions, only second to real estate developers of “luxury condos”) managed to short GS stock down to 70 f*cking dollars at the markets downturn, why I didn’t take out a second mortgage and buy as much as they did I kick myself every day. G’head say as much as you want, I’m applying for that home equity loan as I write this, oh wait isn’t that how we got into this mess to begin with?

• [coaxial]

  Did GS defraud investors? Oh absolutely. Did they provably violate the law, or even violate the law in a way that can’t be proved? I doubt it. Not because they’re not guilty (in the moral, if not legal sense), but because the law is so intentionally vague and weak. Just they way Wall Street and their Republican apologists like.

• [Anonymous]

  Sure sounds like the prosecution has the goods, but, as the ‘Planet Money’ guys very effectively pointed out, they have to prove ‘materiality’: that GS knowingly omitted damaging details about the portfolio to potential investors. Specifically, they have to prove that GS knew both, that Paulson’s company knowingly engineered the portfolio to be a loser, and then planned to short it. I’m not sure how you prove that.

• [Counterglow]

  This is one of the best straight-up informational articles I’ve read in a long, long time. It takes a subject I know very little about, explains it clearly, concisely and without bias. I came away from Barry Ritholtz’ article knowing more than I knew five minutes before, and able to pass on the high points to anybody who asks.

  Truly, journalism at its best.

  Thanks, Barry.

• [Artimus Mangilord]

  Sorry, Mr. Ritholz, but I do not share your optimism. The SEC has been and continues to be a joke.

  “GS would have written a check and quietly settled this.”

  If I were a betting man, I’d say this is exactly what will happen. They’ll pay a settlement and have to sign off something to the effect of “while we admit to omitting material facts, we never maliciously intended to do so.” That or the old “we neither admit nor deny the claims of the SEC” and, again, a paid settlement before going back to business as usual. They just recorded $3B in earnings, so even a $1B penalty is no deathblow.

  For anyone interested, read about Harry Markopolos who wrote letters to the SEC for years re: Bernie Madoff’s scheme, all of which went ignored. It’s not the regulations that are broken, it’s the regulating.

• [Rindan]

  If you understand WTF just happened, this case is really uninteresting in the grand scheme of things. GS isn’t directly responsible for the econopocalypse . What they are being charged with has relatively little to do with why the market imploded. I am all for the SEC enforcing rules and nailing GS’s balls to the wall if they broke the law, but it isn’t like this is justice for what happened to the economy.

  This is a case about how GS acted as an intermediary between two hedge funds. Unless you are a millionaire, your money wasn’t involved. Further, the “victims” in this case, large hedge funds, are people that rightfully deserve to have their faces beaten in for being stupid and not doing research before plowing money into exotic transaction.

  Basically, Paulson, thought that the entire subprime securities market was crap (and he was right). He saw it as being a worthless bubble that was going to explode and wanted to bet against it. He went to GS to try and set up a way to bet against it. The way the bet worked is that Paulson takes out what more or less amounts to insurance on the subprime securities. He shells out a monthly payment, and if the securities go belly up he gets paid the insurance. Paulson pays his monthly fee, GS set up the paperwork and collects a fee to pass on, and someone on the other end of the bet agrees to receive the fee in exchange for agreeing to pay up if the securities go bust.

  The “victims”, the people that agreed to pay, are just as worthless as the lot of them. They agreed to pay on stuff that they couldn’t actually pay. Further, they were taking a bet they clearly didn’t understand or research. Paulson was sending them a check every month (through GS). He wasn’t giving them free money. They failed to do their homework and were shocked when the guy on the other side of the bet turned out to not be insane and won.

  The real tragedy of the econopocalypse was what happened to YOUR money. Your money vanished as a result of these crappy subprime securities that Paulson bet against getting AAA rating from the rating agencies. All of the fraud that ended up screwing the economy and blasting grandmas pension to dust came from that grossly negligent / fraudulent rating, and the “stuff” that happened before the rating (0 interest loans, bundling these crappy securities, rating them, etc). All of the people who committed the real fraud or, at the very least, displayed gross negligence, are getting away unscathed.

  So, hurray for the SEC enforcing the law against GS, but it is like prosecuting a pick pocket while a serial rapist is on the loose. Better than nothing, but hardly comforting.

• [hadlock]

  I’ve never understood why the federal government ever settles cases. They’re there to determine if the company broke the law or not, not to take bribes in the form of settlements to let companies continue breaking the law. I’d support a law that makes the federal government unable to settle a lawsuit outside of court.

  • [Anonymous]

    I do hate it when gov’t settles. but what’s your opinion on the following …

    On 60 minutes , the show presented a case where pfizer was guilty (no need to settle). The gov’t worked out a deal where Pfizer uses one of it’s many child (grandchild) company to plead guilty and be fined. The scheme was cooked up b/c if Pfizer (the parent co.) becomes guilty, it can no longer sell to medicare. This would effectively mean the company is going to be non-competitive , bankrupt, shutdown, lay off people, close labs/offices.

    One can even say that we had to bail out AIG or the whole thing would have collapsed and the reason we had to bail out AIG was that we didn’t do anything for Lehman.

    one has to wonder , who is in control?

    • [peterbruells]

      I fail to see the problem here.

• [Anonymous]

  Is what Goldman Sachs did immoral? Probably. Is what they did legal? Probably. However if they are found ‘guilty’ then I’ll enjoy the legal precedent through visiting my bookies to claim back wagers made on longshot nags that fell at the first fence.

• [rick386]

  While profiting from the mortgage mess may be unpopular, it’s not illegal. I buy puts on companies all the time if I think they are going to drop. If GS lied to or cheated someone, that’s a different story. I just hope this prosecutor isn’t going after them for political gain.

  • [Anonymous]

    “I just hope this prosecutor isn’t going after them for political gain.”

    Ha-ha, now this is vain hope if ever there was one.

• [MCal]

  Who cares if GS lost money; it is the investors who matter.

• [ritholtz]

  I have no position n Goldman Sachs — this is only about the SEC litigation.