SEC Investigation Finds No Evidence Politics Drove Goldman Suit
The U.S. Securities and Exchange Commission’s internal watchdog said he found no evidence a lawsuit against Goldman Sachs Group Inc. was driven by politics or that agency officials timed the case to help President Barack Obama win support for financial-regulation legislation.
The SEC’s April 16 announcement of the suit against New York-based Goldman Sachs was driven by concern it would be leaked to the public, efforts to maintain a relationship with New York Attorney General Andrew Cuomo and “maximizing and shaping positive press coverage,” Inspector General H. David Kotz wrote in an 82-page report released by the agency yesterday.
The SEC sued Goldman Sachs, accusing the Wall Street firm of selling a mortgage security without disclosing that hedge fund Paulson & Co. helped design the asset and was betting it would fail.
Kotz agreed to examine the case after U.S. Representative Darrell Issa, a California Republican, questioned whether the SEC timed the case to help Obama secure enough votes to pass the financial rules overhaul being debated in Congress. SEC Chairman Mary Schapiro denied any communication with the White House or lawmakers.
“This report reaffirms that the case was brought on the merits and only on the merits,” SEC spokesman John Nester said.
Kotz, who reviewed more than 3.4 million e-mails written by 64 current and former SEC officials, said he didn’t find any evidence that agency officials coordinated the Goldman Sachs lawsuit with White House employees, members of Congress, congressional employees or Democratic electoral groups. Sworn testimony was taken from 32 witnesses, the report said.
$300 Million Fine
Goldman Sachs agreed in July to pay a $300 million fine and $250 million as restitution to investors who lost money on the deal. The company didn’t admit or deny the SEC’s allegations.
The SEC also sued Fabrice Tourre, a Goldman Sachs executive director accused of misleading investors who invested in the Abacus collateralized debt obligation. Tourre is fighting the agency’s allegations.
The SEC first scheduled a vote by commissioners on the Goldman Sachs case for December 2009, the report said. The agency delayed the vote so its enforcement staff could take testimony from an additional witness.
The SEC then felt pressure in January 2010 to move the case forward, because agency staff learned that the Senate Permanent Subcommittee on Investigations was considering holding a hearing on Goldman Sachs. SEC officials grew concerned that aspects of the probe might be made public by the panel, which is chaired by Democratic Senator Carl Levin of Michigan, the report said.
The SEC scheduled a second commissioner vote for Jan. 28. The vote was delayed again due to concerns expressed by a commissioner, discussions about whether to accuse an “additional individual” of wrongdoing and a decision by enforcement attorneys to pursue more evidence, Kotz wrote.
Once SEC commissioners approved the case in a 3-2 vote on April 14, the agency encountered obstacles in deciding when to publicly announce the action, Kotz found.
New York’s Cuomo planned to announce a $7 million fine against Quadrangle Group LLC on April 15 over allegations that the money-management firm paid kickbacks to win an investment from a state retirement fund.
The SEC, which was ready to file its own case against New York-based Quadrangle, didn’t want to alienate Cuomo by distracting from his case.
“I was a little worried that the attorney general would be very upset if we announced multiple cases the same day,” Schapiro testified.
SEC staff was also concerned that announcing the agency’s own Quadrangle case and the Goldman Sachs matter on the same day would “confuse the media’s focus” and dilute press coverage, according to the report. As a result, the SEC moved the Goldman Sachs announcement to April 16, the report said.
The disclosure of the Goldman Sachs case coincided with the release of a separate Kotz report into SEC investigations of R. Allen Stanford, who’s facing trial in Texas for spearheading a $7 billion fraud.
Kotz’s earlier probe found the SEC failed to conduct a meaningful probe of Stanford’s firm until 2005 even though agency examiners suspected he was engaging in wrongdoing eight years earlier.
The SEC ultimately sued Stanford in February 2009, claiming he used an Antigua-based bank to sell billions of dollars in bogus certificates of deposit. He’s denied wrongdoing.
Kotz said he failed to find any “concrete” evidence that the SEC delayed announcement of the Goldman Sachs case to detract attention from his Stanford report.
The SEC watchdog also reviewed complaints by Goldman Sachs executives that the agency didn’t warn the firm before filing the lawsuit.
Phone records of a Goldman Sachs attorney found the first call from the SEC came at 10:39 a.m. New York time, ten minutes after the agency filed the case and seven minutes after it issued a press release, according to Kotz’s report.
One unidentified SEC official testified that the agency was concerned Goldman Sachs would try to manipulate media coverage if given too much advance notice.
“Goldman is a pretty sophisticated player,” the SEC official said, according to the report. “If you know that something is coming from the SEC, you can maybe take certain actions to precondition the reporters about the case. Maybe the coverage would not be as favorable, from the SEC’s perspective.”
Opportunities to Settle
SEC Enforcement Director Robert Khuzami testified that Goldman Sach’s attorney contacted him after the lawsuit’s announcement to complain the firm didn’t get a chance to settle the case.
Khuzami told the lawyer that Goldman Sachs had “many opportunities to settle.” Khuzami also said he didn’t think it was a “good idea” for the SEC to always notify a target before filing a lawsuit.
The SEC’s office of public affairs maintains a press policy that says “every effort should be made to avoid the possibility that defendants in an SEC enforcement action first learn of the action when they read about it in the newspapers or when they are called by a reporter for comment,” Kotz’s report said.
The SEC watchdog said the agency didn’t fully comply with the policy in the Goldman Sachs matter.
Goldman Sach’s shares tumbled as much as 16 percent after the case was announced, and financial stocks fell broadly that day. Lorin Reisner, Khuzami’s deputy, testified that additional consultation with SEC officials who oversee stock trading before filing the case “couldn’t have been a bad thing,” according to the report.
Alarmed by Coverage
Kotz found SEC officials, including Schapiro, were alarmed by the amount of press coverage the case received.
“Many SEC witnesses in this investigation, including Chairman Schapiro, testified that they were surprised or shocked at the extent of the media attention given to the Goldman action,” he wrote.
“This belief held by the SEC staff, which is corroborated by e-mails, that the Goldman action might not have significant public impact, much less the impact that it ultimately had, is another factor that argues against the idea that the SEC or its staff were attempting to influence financial regulatory reform legislation,” Kotz’s report said.