Many of us were intrigued to hear the news of Goldman Sachs being charged with fraud on Friday by the Securities and Exchange Commission (SEC). The gathering storm around Goldman and hence the banking and investment community at large has given us a sense that justice may be coming to this corner of the world.
But deeper still there was the nagging question:
Where are the criminal charges?
Over the weekend I stumbled upon something I think is a must read for everyone who wants to know the implications of the Goldman Sachs case. For Goldman, as well as others including the banks, hedge funds, and investment firms, this may be the beginning of a new era...and it may have begun with the "Kiss of Death"
The first hint of how this might play out began with this little tidbit from Barry Ritholz's blog The Big Picture. The Big Picture
Here’s a little “inside baseball” stuff.
Sam Antar, the former CFO of Crazy Eddies who now specializes in training investigators how to uncover White Collar Fraud, noted the significance of a Friday SEC Complaint:
“The SEC filed the lawsuit on Friday without giving Goldman the heads up.
When a company receives a surprise subpoena or a lawsuit on a Friday, it is known as the “kiss of death” from the SEC. (I received my first SEC subpoena on a Friday afternoon, back in the day). It is meant to ruin your weekend plans (yes, the SEC can get personal in its own way), since your lawyers usually don’t work weekends.
Goldman compounded its problem by putting out a misleading press release contesting the SEC’s charges. That press release can be the basis for later 10b-5 violations, if the SEC wins its case against Goldman.
Goldman should not engage in a public debate on this issue, if they want to avoid being baited by the SEC.
Kiss of Death
This alone in and of itself is intriguing. Saying that not only did Goldman not know the charges were imminent that day but they were ill prepared for this was a revelation. Let's face it, many people thought Goldman probably made money that day shorting there own stock. But they were not prepared. Not only that, they may have dug a much deeper hole as I found out when I followed the links to Sam Antar's blog White Collar Fraud
Below are money quotes from this blog post but suffice it to say this is definitely worth a read and is finding it's way around the blogosphere rather quickly...
Compounding Legal Problems for Goldman?
The "kiss of death" message is deliberately sent on Fridays to chill the bones of criminals. Some criminals wait in anxiety during the weekend until Monday to consult with their attorneys about what to do next. Other criminals or SEC targets like Goldman Sachs don't want to wait until Monday. So they make rash decisions and major errors in prematurely reacting to the "kiss of death" message to their own peril and find themselves in legal quicksand.
Goldman Sachs chose not to wait until Monday and fully digest the implications of the SEC complaint. After a relatively short consultation with its attorneys, the company hastily issued a detailed press release later Friday afternoon that I believe will land it into deeper potential trouble.
This looks promising...
After the stock market closed on Friday, a startled Goldman Sachs issued a detailed press release responding to the SEC lawsuit and possibly created a new set of legal problems by apparently misleading investors about certain issues being litigated and obscuring other issues. They took the carefully laid out bait provided by the SEC's "kiss of death" message and screwed up royally.
And who will the SEC send out as lead counsel against Goldman??
The SEC chose top gun Richard E. Simpson as its lead counsel in its lawsuit against Goldman Sachs and Fabrice Tourre. Coincidently, Richard E. Simpson was the same lead counsel for the SEC in its successful case against Crazy Eddie and the Antar family.
I think one can assume Sam Antar has a pretty good idea of how Simpson operates...Simpson has been affectionately called the 'Pit Bull' and there is much more information on Simpson here.
Goldman Sachs and Fabrice Tourre could not have drawn a tougher adversary from the SEC than Richard Simpson who is a pro among pros. Like Simpson chased the Antars and their money to all ends of the earth, he can be expected to be even more relentless in his pursuit of the "high and mighty" Goldman Sachs in any long running legal marathon.
By sending the "kiss of death" message to Goldman Sachs in filing its lawsuit on Friday, the SEC led by Simpson was able to get Goldman Sachs to prematurely react to the SEC complaint and make grave errors.
From here Antar breaks down in legal terms what the charges are and then weighs the charges against the stupefying reaction of Goldman. Then he lays out what is the most interesting bit. How is Goldman essentially being baited?
Many people are upset that the SEC brought civil charges against Goldman Sachs, while the Justice Department has not filed any criminal charges against the company. Back in the Crazy Eddie days, we faced two parallel probes, a civil probe from the SEC and a criminal probe from US Attorney Michael Chertoff in Newark, New Jersey.
Simpson effectively baited certain members of the Antar family into testifying and lying under oath in the civil case, rather than exercising their right against self-incrimination under the 5th Amendment to the US Constitution. Those lies told by the Antars were later used as the foundation for the successful criminal case brought to trial by US Attorney Michael Chertoff.
So Goldman could essentially be building a criminal case against itself by reacting 'vigorously' to the charges being brought by the SEC.
Goldman Sachs does not seem to realize that as a public company it cannot have a level playing field for itself in responding to allegations of fraud by the SEC. If Goldman Sachs loses the lawsuit, investors can claim that they were misled by the company's statement that "the accusations are unfounded in law and fact" under Rule 10b-5.
The Goldman Sachs press release is materially misleading to investors and it can give rise to additional securities law violations under Rule 10b-5. The SEC complaint has a very sound basis in both fact and the law under Rule 10b-5, contrary to the Goldman Sachs press release which claims that "the accusations are unfounded in law and fact."
Well...this really could get interesting.
In any company, especially a company that is the size of Goldman Sachs, there are always some employees who bend the rules or break the law and end up getting a company in legal trouble. By circling the wagons around Fabrice Tourre, Goldman Sachs raised the ante from a single employee issue involving a certain corporate transaction to a corporate wide issue involving the entire company. A very dumb move!
Note: Bold print above added by me.
Please do yourself a favor and go read the piece. It is great stuff.
One more note of interest on how Goldman is not helping itself. This is hubris...
Is Goldman's Goose Cooked?
By the way, if you are one of the many GS investors who are angry that your company is being accused of fraud - consider the fact that GS received a Wells Notice from the SEC in July of 2009 indicating that it was a target of an active investigation. The WSJ reports that Goldman responded to the Wells notice in September. In March, Goldman contacted the SEC to check on the status of the investigation but at no point along the way did they report to investors (even Buffett?) that they were under investigation as their stock went from $140 to $190 - that too is an actionable issue and makes GS subject to lawsuits from investors who were burned buying their stock since last July
Note: Bold print added by me.
Have they hit the iceberg??
This will take a good deal of time to play out and seeing the outcome at this point is unclear. Goldman could right itself and find a firm footing to defend itself from but I get the sense that they have done themselves a great deal of damage. At some point public opinion shifts. We maybe reaching the tipping point when whatever spin Goldman and the rest of the banksters spin out there it is met with derision, scorn and a sense of deep distrust by the majority of public opinion. For some of us that has already happened. For many we are moving into new territory. That is not a world Goldman or the banks want to see. However it may be inevitable and for the majority of us, very welcome.