The WSJ’s investigative reporting team has dug into the SEC’s controversial decision to charge Goldman with fraud.
One of the most unusual (and in our opinion) disturbing aspects of the decision was that even the SEC was split on whether the charge was merited.
Given the damage the charge has caused–$20 billion of Goldman’s market cap has been vaporized, countless millions have already been spent on legal and PR fees, reputations have been destroyed–one would have hoped that at least the home team would be unanimous in its view that Goldman broke the law. But it wasn’t.
Two of the 5 SEC commissioners voted against charging Goldman with fraud. In the meeting, moreover, one of them is reported to have said “I have serious doubts about the evidence of fraud.” And that’s after the SEC enforcement staff presented the strongest evidence the agency has against the firm.
We still think the case will be settled, with Goldman paying a fine of at least $1 billion, expressing contrition, and possibly dumping Lloyd Blankfein. That will go down as a big and much-needed victory for the SEC. But it won’t answer the question as to whether the charge really should have been brought in the first place.
Here’s the WSJ’s description of the decision meeting, as reported by Monica Langley, Kara Scannell, Susan Pulliam, and Suzanne Craig:
It was standing-room only in the windowless room where the Securities and Exchange Commission’s five commissioners met last month to decide whether to sue Goldman Sachs Group Inc. for fraud. From top to bottom at the beleaguered agency, staffers and lawyers who saw the giant Wall Street firm on the confidential enforcement calendar wanted to witness the drama.
Once the enforcement team laid out its recommendation to sue Goldman—arguing that the firm had misled investors about highly complex securities linked to the cratering mortgage market—the commissioners questioned the lawyers on the strength of the evidence. They also debated whether the SEC was essentially sailing into uncharted territory by attacking a relatively new financial product. “I have serious doubts about the evidence of fraud” prevailing in court, said Troy Paredes, one of the two Republican appointees on the commission, according to two people in the room.
The enforcement staff argued that it could build a record strong enough to support the fraud charges. Finally, SEC Chairman Mary Schapiro called for a vote, even though it was obvious there was serious disagreement among the commissioners. In the end, the two Democratic commissioners voted for the case to proceed and the two Republicans against. Ms. Schapiro, an independent named by President Obama, cast the deciding vote to go ahead…