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Goldman Sachs Hearing on Capitol Hill

JT Allen

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There was a circus on Capitol Hill Tuesday April 27, 2010. Many of Goldman's top executives came to face the wrath of a bi-partisan U.S. Congressional committee, specifically, the Senate Permanent Subcommittee on Investigations chaired by Senator Carl Levin.

The executives at Goldman are very adept at wasting time, with seemingly relentless pleas of "I can't find the chart you're referencing," or, "I've never seen this or that, give me time to catch up." These guys are skilled at least two things: inherently difficult to understand financial instruments ("Synthetic CDO's")and really never answering any of the Subcommittee's questions directly, if at all.

If Daniel Sparks (the former head of Goldman's mortgage department - he has since departed the firm) had been in a court of law the judge would have thrown the book at him with coma-inducing force. Sparks claimed to not know what a "stated-income loan" was. Really? That's roughly the equivalent of an auto mechanic claiming he doesn't know what a "headlight" is. it's that obvious. It is a loan based upon your stated income, rather than your verified income. Not a difficult concept to grasp. While we're on the subject of this stated income loan, let's take a little closer look at how this same concept would work in other areas. Say you wanted to start a business: wouldn't it be great to walk into a bank, ask for a 5 million dollar loan and when the bank says "what have you got for collateral" you reply "oh don't worry about it, I make 10 million dollars a year as a cashier at Wal-Mart" and they, in turn, reply "oh well that's no problem, let's just write you a bank-check so you can get out of here." That's what a stated income loan is. Pretty sweet deal, right? The only problem is many people (Goldman execs excluded of course) tend to stretch the truth a bit when it comes to "stated income." But I digress.

The Goldman boys (Golden Boys?)are a wily bunch. Though cool as a cucumber, the 31 year old Fabrice Tourre (aka, in his own words, "The Fabulous Fab")wrote an email in which he described the financial instruments he helped create (and sell)as [sic] "pure intellectual masturbation," and "a ‘thing’ which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price" yet, alas, he too is innocent.

Sure, the Chairman of the Committee, Carl Levin, threw out a rather salty word (literally, the acronym for "Ship High In Transit")which there appears to be quite a flap about, but in his defense he was merely quoting an internal Goldman email which describes securities they were selling as, precisely, said acronym.

I watched the entire proceedings with morbid curiosity. Lloyd Blankfein, the President and CEO of Goldman Sachs, was last to testify. At first he struck me a arrogant and smarmy and I had a profound dislike for him. Then a funny thing happened: as the testimony progressed, I almost (almost) began to like him. This may be a harsh assessment, but he reminded me of a highway accident: you WANT to look away, but you CAN'T look away. Make no mistake: this man was a key player in the destruction of an almost inconceivable number of dreams, plans, futures, college funds, etc, etc. and was compensated to the tune

of tens of millions of dollars for the privilege of wreaking havoc on huge numbers of innocent people


(to be cont.)

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  • 1 year later...

The Securities and Exchange Commission today charged that Goldman, Sachs & Co. lacked adequate policies and procedures to address the risk that during weekly “huddles,” the firm’s analysts could share material, nonpublic information about upcoming research changes. Huddles were a practice where Goldman’s stock research analysts met to provide their best trading ideas to firm traders and later passed them on to a select group of top clients.


Goldman agreed to settle the charges and will pay a $22 million penalty. Goldman also agreed to be censured, to be subject to a cease-and-desist order, and to review and revise its written policies and procedures to correct the deficiencies identified by the SEC. The Financial Industry Regulatory Authority (FINRA) also announced today a settlement with Goldman for supervisory and other failures related to the huddles.


“Higher-risk trading and business strategies require higher-order controls,” said Robert S. Khuzami, Director of the Commission’s Division of Enforcement. “Despite being on notice from the SEC about the importance of such controls, Goldman failed to implement policies and procedures that adequately controlled the risk that research analysts could preview upcoming ratings changes with select traders and clients.”


The SEC in an administrative proceeding found that from 2006 to 2011, Goldman held weekly huddles sometimes attended by sales personnel in which analysts discussed their top short-term trading ideas and traders discussed their views on the markets. In 2007, Goldman began a program known as the Asymmetric Service Initiative (ASI) in which analysts shared information and trading ideas from the huddles with select clients.


According to the SEC’s order, the programs created a serious risk that Goldman’s analysts could share material, nonpublic information about upcoming changes to their published research with ASI clients and the firm’s traders. The SEC found these risks were increased by the fact that many of the clients and traders engaged in frequent, high-volume trading. Despite those risks, Goldman failed to establish adequate policies or adequately enforce and maintain its existing policies to prevent the misuse of material, nonpublic information about upcoming changes to its research. Goldman’s surveillance of trading ahead of research changes — both in connection with huddles and otherwise — was deficient.


“Firms must understand that they cannot develop new programs and services without evaluating their policies and procedures,” said Antonia Chion, Associate Director in the SEC’s Division of Enforcement.


In 2003, Goldman paid a $5 million penalty and more than $4.3 million in disgorgement and interest to settle SEC charges that, among other violations, it violated Section 15(f) of the Securities Exchange Act of 1934 by failing to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information obtained from outside consultants about U.S. Treasury 30-year bonds.


The 2003 order found that although Goldman had policies and procedures regarding the use of confidential information, its policies and procedures should have identified specifically the potential for receiving material, nonpublic information from outside consultants. Goldman settled the SEC’s 2003 proceeding without admitting or denying the findings.


The order issued today finds that Goldman willfully violated Section 15(g) of the Exchange Act (formerly Section 15(f)). The SEC censured the firm and ordered it to cease and desist from committing or causing any violations and any future violations of Section 15(g) of the Exchange Act. Under the terms of the settlement, Goldman will pay a $22 million penalty, $11 million of which shall be deemed satisfied upon payment by Goldman of an $11 million penalty to FINRA in a related proceeding. The SEC considers a variety of factors, including prior enforcement actions, when determining sanctions.


In addition, Goldman agreed to complete a comprehensive review of the policies, procedures, and practices relating to the SEC’s findings in the order, and to adopt, implement, and maintain practices and written policies and procedures consistent with the findings of the order and the recommendations in the comprehensive review. In June 2011, Goldman entered into a consent order relating to the huddles and ASI with the Massachusetts Securities Division (Docket No. 2009-079). In the SEC’s action, Goldman admits to the factual findings to the extent those findings are also contained in Section V of the Massachusetts Consent Order, but otherwise neither admits nor denies the SEC’s findings.


Stacy Bogert, Drew Dorman, Dmitry Lukovsky, Alexander Koch, and Yuri Zelinsky in the SEC’s Division of Enforcement conducted the investigation.


The SEC thanks FINRA for its assistance in this matter.

# # #

For more information about this enforcement action, contact:

Antonia Chion

Associate Director, SEC Division of Enforcement

(202) 551-4842

M. Alexander Koch

Assistant Director, SEC Division of Enforcement

(202) 551-4762

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