GS Case Will Ripple Through Industry

As widely reported and commented upon, on April 16, 2010, the Securities and Exchange Commission (“SEC”) brought charges against Goldman, Sachs & Co. (“Goldman Sachs”) for allegedly “defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter”. The SEC claims Goldman Sachs failed to disclose vital information about an investment opportunity to investors.


In particular, the SEC claims that Goldman Sachs did not disclose the role that a major hedge fund had with structuring the deal and that they would take a short position.

Beyond the obvious implications related to the broker-dealer arm of one of the world’s leading investment banking and securities firms being charged with fraud by the SEC, we believe there may be a few interesting side-effects, potentially prompting movement around application of “fiduciary status”, financial reform, and the SEC’s efforts to receive increased funding.

Fiduciary Status and Disclosure

The case reflects to the public some of the realities of the market in which investment advisers, broker-dealers, hedge funds, and investment companies have operated. Who can we trust for full disclosure? This case against Goldman Sachs appears to be throwing flame to the fire regarding the lingering issue related to whether or not broker dealers should be considered fiduciaries. Maybe this case will prompt a resolution on that front.

Political Timing Tied to this Case?

Some have questioned the filing of the case just before Senate was scheduled to consider financial regulatory reform amendments.

Last week, SEC Chairman Mary Schapiro, also may have managed to pick the prime time to call on Congress to provide a 12 percent boost to the regulator’s budget next year. She said the budget request would allow the agency to hire 374 new officials, bringing the regulator’s staff to 4,200, and expand investments in surveillance and other technology. (Given the high standards and expectations placed on the SEC, the least we can do is give them a little funding to beef up staffing and training.)

Trust but Verify

The securities industry needs to be transparent. Information needs to be reliable so that investors can make informed decisions. It’s not the first time we have quoted Ronald Reagan’s infamous use of the Russian proverb, “Trust, but verify”. We hope that it becomes easier for investors to trust and verify. We hope that all the pain endured today by market participants will help move securities markets in the near future to where information is fully and fairly available regardless of whether hedge fund managers are regulated and broker dealers are deemed “fiduciaries”.