SCANDALS: Penn Central Precedents?
Monday, May. 13, 1974
The Securities and Exchange Commission was only doing what had long been expected last week when it filed civil suits charging that massive fraud preceded the spectacular 1970 bankruptcy of the Penn Central. Even so, the suits—one against twelve former officers and directors of the railroad, headed by onetime Chairman Stuart T. Saunders, and also the accounting firm of Peat, Marwick, Mitchell & Co.; another against the investment firm of Goldman, Sachs & Co.—are unusually significant.
This would also be unusually significant even today, considering now the squid is securely on the face of Washington, D.C.
The SEC is clearly trying to set precedents that would expand its regulatory authority over company directors, the commercial paper market and independent auditors.
Ha! Authority over Goldman Sachs? HOW DARE YOU CHALLENGE YOUR GODS!
Funny thing about the commercial paper market today, especially CDSes, there is no independent auditor because the entire process is off-the-books. So, technically, we have regressed since even the laissez-faire days of the era in question.
The SEC contends that Saunders, David C. Bevan, Penn Central's former chief financial officer, and other Penn Central managers arranged improper transactions between the railroad and its subsidiaries, improperly recorded revenue and made false statements about Penn Central's borrowings.
It's Greece and AIG all over again, or before again! How long has GS being doing this? I love how they profit from the loses of both sides, a great business model.
Evil, but brilliant.
The SEC is also attempting to:
- Establish a doctrine that "outside" directors of a company (directors who are not company officers) must be alert to any suspicion of fraud. The SEC claims that three outside directors of Penn Central&* "had reason to know" that managers were misrepresenting the railroad's financial condition, but wrongfully kept quiet.
- Make more information available to buyers of commercial paper (short-term corporate lOUs). Goldman Sachs insists that it did nothing wrong in marketing $83 million of commercial paper for Penn Central in the six months before the bankruptcy. But it signed a consent decree under which it promised that it will investigate companies for which it sells commercial paper and tell would-be buyers what it finds out.
- Clarify the obligation of accountants to take a hard look at transactions that company managers ask them to approve. The SEC contends that Peat, Marwick failed to give "due professional consideration to the economic substance" of several Penn Central "transactions, schemes and ... devices." Peat, Marwick says the charges are "unfair."
Wow, such a more innocent day, when GS was just looting people with IOU commercial paper for a measly $83 million. Though a lot of money in 1970, GS would go on to refine this model to basically loot the entire world.
And with Clinton repealing Glass-Steagall, there was no need for an independent auditor like Peat, Marwick! GS could deal on both sides of the fence with no middle man to blow the whistle.
The SEC is seeking only civil penalties—injunctions or consent decrees barring the defendants from committing the same acts again. But a federal grand jury in Philadelphia is investigating the possibility that some former Penn Central officers broke criminal laws and thus may be liable to jail sentences.
Bwahahahahah! Yeah, Goldman Sachs totally followed the consent decree. Maybe a LAW would have been better. You are on your best behavior now GS, no cheating!
But you have to tell us when you cheat!
Great idea, SEC, great idea.
I came up with a new slogan for GS after reading this:
"Successfully Monetizing Conflict of Interest Since Before You Were Born, Goldman Sachs"
Cycles, thems the crumbs of crumbled cookies.
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