In last year’s grand legal battle, Goldman Sachs allowed a minor case of misrepresentation in a sale of mortgage backed securities to a sophisticated investor to become a calamity. The end result of the Abacus case was a record setting $550 million dollar SEC fine.
Last week, Senator Carl Levin released a massive report on the credit crisis. He suggested that the committee might refer their report to the Justice Department for consideration of criminal charges of Perjury or Obstruction of Congress.
When the Abacus case was pending, I warned Goldie that it was a slam dunk case of violating black letter security law. Had they not listened to the crowd, they could have saved about a half a billion dollars in fines. This current issue is far more murky; I would suggest against settling it, and I would be much more willing to fight criminal charges.
This post marks the very first time I ever found myself advising Goldman Sachs not to settle.
The prosecution will turn on the language Goldman’s CEO and CFO used in describing the short bets GS made against the residential mortgage market while selling similar investments to clients. That turns out to be far more ambiguous than you might surmise. This is a much harder case to prove than the “material misrepresentation” of the Fabulous Fab case.
Consider the following:
• Goldman is a huge firm, with many different divisions, proprietary traders, and hedging strategies. Think of them as 100 hedge funds together under one roof. The firm does not have a single coordinated position.
• At various times, GS was simultaneous long and short positions in mortgage backed paper. But at various times, the firm was also simultaneously long and short in various stocks, bonds, etc.
• Different traders may have put on short trades against residential real estate, but that was their own trades. In a firm made up of traders, there is a difference between a firm position and an individual putting on a trade.
• Until the year 200X, GS the firm had no official position on the mortgage market. They will argue that once they decided, on a firm wide basis, to get out of the mortgage market, they began to wound down their sales to clients. This was a process that took about 6 months, and there may have been some overlap.
Dealbook notes that the governing statute is 18 U.S.C. § 1515(b), and it states “acting with an improper purpose, personally or by influencing another, including making a false or misleading statement.”
Thus, the “improper purpose” turns on the intent of the witnesses in front of Congress. In order to succeed at proving this was criminal, the prosecutors would need to show a clear intent. The full testimony of Blankfein would need to be considered, and include the overall frankness of what was said. A jury watching the entire testimony is likely to find it challenging to reach that conclusion.
To the prosecutors, I would exhort that there is so much low hanging fruit in terms of bank fraud that you should focus your efforts there: There was “Origination Fraud” that took place; Nonfeasant Regulators who refused to do their legal duty because it disagreed with their personal philosophy. MERS engaged in dubious behavior that can best be described as “Extra-Legal;” Foreclosure Fraud remains rampant; All prosecutors need to do is follow the money to see how systemic bank fraud contributed to the financial crisis.
But Blankfein’s testimony? That is going to be a more challenging case to make . . .
Finding Goldman at Fault in the Crisis
PETER J. HENNING
NYT, APRIL 18, 2011, 12:59 PM