SEC Takes On Goldman Sachs – A Sea Change Or A Big Fish To Calm Waters?

by William K. Wolfrum

For the past decade or so, the acronym SEC has better stood for “Sitting Enjoying Coffee” rather than “Securities Exchange Commission.” After all, one need only mention the name “Bernie Madoff” to turn your average SEC employee into a puddle of apologetic goo.

Today, however, the SEC announced it is going after a big fish. Perhaps the biggest, as the SEC filed fraud charges against Goldman Sachs, accusing the mega-financial outfit of selling investments that they had secretly planned to have fail. From The Huffington Post:

The government has accused Goldman Sachs of defrauding investors by failing to disclose conflicts of interest in mortgage investments it sold as the housing market was faltering.

The Securities and Exchange Commission announced Friday civil fraud charges against the Wall Street powerhouse and one of its executives. The agency alleges Goldman failed to disclose that one of its clients helped create — and then bet against — subprime mortgage securities that Goldman sold to investors. In essence, Goldman is accused of pushing a mortgage investment that was secretly devised to fail.

Investors in the mortgage securities are alleged to have lost more than $1 billion, the SEC noted.

The SEC claims Goldman Sachs and one of its top officers misled investors by not disclosing that hedge fund manager John Pauson, who made billions betting against the housing market, selected the assets that went into a complex security called “Abacaus.”

Paulson & Co. is one of the world’s largest hedge funds, and paid Goldman roughly $15 million for structuring these deals in 2007.

While any action against Goldman Sachs will be roundly applauded by supporters of financial reform and regulation, the question remains whether or not this case showcases a new, aggressive SEC, or an SEC that’s looking to get good media play for taking on a financial powerhouse.

On one side, the past few years have been a cavalcade of SEC missteps and outright incompetence, including:

• The $50-billion Bernie Madoff Ponzi Scheme;
• The $8-billion Stanford Group Fraud; and
• Securities Fraud at Moody’s Investor Services.

On a smaller scale, there has been the restatement kings at Overstock.com having managed to sneak past one SEC investigation and appearing poised to get by a second investigation, Interoil’s toying with its numbers and press releases in order to gain higher stock numbers, and a multitude of other cases that have shown an SEC that struggles to regulate.

And, to make matters all that much more incompetent, the SEC has had to spend time dealing with its own in-house Internet-porn problems.

With still so much on their plate, forensic accountant and fraud examiner Tracy Coenen, for one,  has her doubts of whether the Goldman Sachs action will lead to a more aggressive SEC, or is showcasing an SEC in “CYA” mode.

“I’d like to be optimistic that this is part of a new and improved SEC that will go after bad actors more aggressively,” said Coenen, who writes at the Fraud Files Blog. “However, with their history of incompetence, I can’t help but be skeptical of the results they’ll actually get and what it will mean for the SEC possibly getting tougher on corporate fraud.”

Still, the SEC has come out swinging lately, promising to make regulation a part of their charter once more. Only two days ago, SEC Chairman Mary L. Schapiro said “the Commission will consider proposals designed to strengthen our oversight of the markets and promote greater fairness and efficiency.”

One interesting source, former “Crazy Eddie” fraudster-turned-whistleblower Sam Antar, said he believes this could be a tide-turning moment for the SEC, and that at the very least he expects them to go hard after Goldman Sachs. And Antar should know. The SEC’s lead investigator on the Goldman Sachs case – Richard Simpson –  was also the lead investigator in the SEC case against “Crazy Eddie.”

“This is full court press,” said Antar, an admitted felon who writes at the Web site White Collar Fraud. “Simpson is a very tough litigator and is relentless. He works 90 hours a week day and night. He is brilliant!”

By: William K. Wolfrum

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