As we noted yesterday, the SEC appears to have acted in an unusual way on Friday morning when it filed fraud charges against Goldman Sachs. Specifically, it appears to have caught Goldman by surprise, announcing the fraud charges without giving Goldman a heads-up.
Normally, the SEC’s attorneys are in close communication with the attorneys of its targets. If the agency intends to file charges, it is customary to tell the target in advance, so the accused party isn’t blindsided. (The same is true in many white-collar criminal proceedings: If an executive is going to be indicted, the executive’s attorneys are usually notified in advance.)
The exception is when prosecutors think the target is a flight risk (which obviously doesn’t apply here), or when the prosecutors want to maximise the headline value of the charges.
Yesterday, for more than an hour after the SEC filed its charges, the SEC had the headlines to itself. A short Goldman denial appeared around noon, and a longer, more compelling one appeared at the end of the day, when most people had already started checking out for the weekend. Thus, the SEC’s fraud story dominated the headlines all day long.
Now, there are many reasons why the SEC might have chosen to act this way, all of which were understandable:
- It looks tougher (everyone hates Wall Street these days, and the SEC has looked wimpy)
- It looks pro-active (for once, the SEC is ahead of the game)
- It does more damage (by the time people have time to examine the allegations in detail, most people have made up their minds about the accused’s guilt).
And then there’s another factor that might have affected the timing of the SEC’s release.
The timing of big announcements is often chosen with the aim of maximizing coverage (or minimising it, in the case of bad news), or with the aim of pushing other stories out of the headlines.
What other stories might the SEC have wanted pushed out of the headlines yesterday?
Perhaps another one about the agency’s past incompetence and, possibly, corruption.
Yesterday, amid the Goldman fraud outrage, the results of another investigation into the SEC’s failure to spot Allen Stanford’s ponzi scheme were published. They were devastating:
The Securities and Exchange Commission suspected Texas financier R. Allen Stanford of running a Ponzi scheme as early as 1997 but took more than a decade to pursue him seriously, according to a report further tarring the agency that missed Bernard Madoff’s huge fraud.
The report by the SEC’s inspector general says SEC examiners concluded four times between 1997 and 2004 that Mr. Stanford’s businesses were fraudulent, but each time decided not to go further. It singles out the former head of the SEC’s enforcement office in Fort Worth, Texas, accusing him of repeatedly quashing Stanford probes and then trying to represent Mr. Stanford as a lawyer in private practice.
The former SEC official, Spencer Barasch, is now a partner at law firm Andrews Kurth LLP. He couldn’t be reached for comment, but Andrews Kurth managing partner Bob Jewell said the firm believes Mr. Barasch acted properly. The inspector general referred Mr. Barasch for possible disbarment from practicing law.
That sounds bad. Very bad. If the SEC hadn’t charged Goldman with fraud yesterday morning, THAT story would have dominated the day’s headlines. As it is, the story got nary a mention.
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