Goldman Sachs vs. SEC: Notes on a scandal

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Difference between Goldman Sachs and SEC

The financial world is no stranger to various issues and controversies, but few have hogged the headlines like the recent scandal involving the Goldman Sachs Group Inc. and the SEC. The decision has already been handed over, with Goldman Sachs having to pay a whopping $550 million in penalty charges, which is the largest ever paid by a Wall Street firm. Let's take a look at some of the key points in the case.

The Issues

The primary issue at stake was the misleading of investors with regard to collateralized debts connected with sub-prime mortgages. Some of the mitigating factors in the issue was the actions of Peter Davis of Davis Capital Investment Ideas in providing insider information to various clients after learning of the cessation of the "long bond"–which is a 30-year bond–after attending a press conference held by the Treasury Department on October 31, 2001. Another of the accused was John M. Youngdahl, who as Vice President and Senior Economist of Goldman, Sachs & Co. benefited from the information provided by Davis. Youngdahl subsequently provided insider information to certain traders as well, resulting in the purchase of $84 million worth of the said bonds for the company’s own accounts. This netted the Goldman Sachs profits of more than $1.5 million.

The Verdict

In the wake of the SEC’s impending lawsuit against Goldman Sachs, the company settled the case out of court to the tune of $55 million, which was the largest ever paid by a Wall Street firm. Goldman Sachs has neither admitted nor denied the SEC’s allegations however, and the case is still subject to approval by the United States Court for the Southern District of New York. The company did acknowledge that certain marketing materials called into question were incomplete, and that it made a mistake in providing the reference portfolio to select traders without divulging Paulson & Co. Inc.'s role in the process. Spokespersons for Goldman Sachs also stated that the settlement decision was in the best interests of the company as well as is its shareholders and clients.

The Aftermath

To this date, it remains uncertain as to whether or not the case and subsequent settlement by Goldman Sachs would have an effect on how banks do business. Some of the conflicts that lie at the heart of the issue remain unresolved, and even SEC enforcement chief Robert Khuzami didn't appear to be confident in a favorable outcome. Khuzami has since gone on record to implore other financial institutions to avoid these kinds of activities in the future, citing the need for vigilance and deterrence. At the time of this writing, the SEC also maintains the option to reopen the case based on new evidence.

Summary

Goldman Sachs

  • Main issue revolves around debts connected with sub-prime mortgages
  • Many of the accused provided insider information stemming from a Treasury hearing on the cessation of the "long bond"
  • Acknowledge certain lapses, although neglected to deny or confirm the SEC’s allegations
  • Has stated that the settlement decision was in the best interests of the company as well as is its shareholders and clients

SEC

  • Is of the opinion that some of the conflicts that lie at the heart of the issue remain unsolved
  • Has implored other financial institutions to avoid these kinds of activities in the future,
  • Maintains the option to reopen the case based on new evidence

Which side are you on?
  • Goldman Sachs
  • SEC
 
 

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