Saturday, 17 April 2010

A Pyrrhic victory for the SEC in its charges against Goldman Sachs?

Henry Blodget has an interesting take on why the SEC decided to move against Goldman Sachs yesterday, apparently without giving the firm any prior notice of its intention, and on a Friday during market hours when there would undoubtedly be a risk of severe market turbulence.

In this posting he suggests that the move was designed to distract from some even more potentially troublesome news which the SEC disclosed yesterday as well.

To quote from Blodget's piece

Yesterday, amid the Goldman fraud outrage, the results of another investigation into the SEC's failure to spot Allen Stanford's ponzi scheme were published. They were devastating:

The Securities and Exchange Commission suspected Texas financier R. Allen Stanford of running a Ponzi scheme as early as 1997 but took more than a decade to pursue him seriously, according to a report further tarring the agency that missed Bernard Madoff's huge fraud.

The report by the SEC's inspector general says SEC examiners concluded four times between 1997 and 2004 that Mr. Stanford's businesses were fraudulent, but each time decided not to go further. It singles out the former head of the SEC's enforcement office in Fort Worth, Texas, accusing him of repeatedly quashing Stanford probes and then trying to represent Mr. Stanford as a lawyer in private practice.

The former SEC official, Spencer Barasch, is now a partner at law firm Andrews Kurth LLP. He couldn't be reached for comment, but Andrews Kurth managing partner Bob Jewell said the firm believes Mr. Barasch acted properly. The inspector general referred Mr. Barasch for possible disbarment from practicing law.

That sounds bad. Very bad. If the SEC hadn't charged Goldman with fraud yesterday morning, THAT story would have dominated the day's headlines. As it is, the story got nary a mention.
While it is certainly true that the SEC's failure to address the blatant examples of Stanford's Ponzi scheming, and, of course, the numerous documented allegations about Madoff, is indicative of a watch dog that doesn't even know how to bark, there is a danger that the SEC may have opened an even bigger can of worms with the GS charges.

Perhaps it will all be settled with a large fine for the folks at Goldman and allow the Administration to look tough, but there is a danger that - just to take one example - UK taxpayers who, owing to the massive ineptitude of Royal Bank of Scotland which allegedly lost about $800 million on the deal that the SEC has drawn attention to, may be encouraged to explore a class action lawsuit.

Moreover there could be plenty of other deals in which the taxpayers of other jurisdictions ended up as on the wrong side of deals with the characters discussed in Micheal Lewis' well written book on the winners in the CDO fiasco.

In its haste to bury bad news with a distraction, the SEC could end up with a Pyrrhic victory.

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