April 28, 2010

Goldman Sachs: What to Make of the Circus?

With representatives from Goldman Sachs testifying – for 11 hours! – before the Senate Banking Committee yesterday (see this morning’s WaPo article, with over 500 comments already), the 24-hour coverage of Goldman’s perceived role in the financial crisis continues. Personally, I’m still puzzled by the all the coverage – the underlying theme of the stories is not really new news. Ever since the crisis came to light, it has been well known that Goldman was far less impacted by the housing market collapse compared to its brethren – and for the most part, they were called geniuses until now.

Here’s a hodge-podge of Goldman-related stories that I found interesting:

– Today’s Washington Post editorial “Goldman and the blame game

– MarketWatch’s “Assessing the coverage of Goldman Sachs

– Tom Brakke’s “The Sideshow” from “The Research Puzzle”

– This NY Times’ Dealbook column entitled “A Crowd With Pity for Goldman”

– In this article, Harvey Pitt provide his thoughts on the risks of the SEC losing the Goldman case

– In his “Ideoblog,” Prof. Larry Ribstein describes how the SEC’s Goldman case continues its war on “shorts” – and here is Larry’s analysis on how the case is mutating

– In his “SEC Actions” blog, Tom Gorman writes about “The SEC, the Goldman Case and Critics”

– A former Goldman Sachs director is alleged to have tipped Galleon Group, touching Warren Buffett’s investment in Goldman, as noted in this Reuters article

Although things are moving so fast, that it’s relevance may be limited – Ted Allen provides these notes from last Wednesday’s House hearing on the regulatory reform bill.

Big Changes Afoot: How to Handle a SEC Enforcement Inquiry Now

We have posted the transcript for the recent webcast: “Big Changes Afoot: How to Handle a SEC Enforcement Inquiry Now.”

One topic discussed at length during the program is “when disclosure of an SEC investigation is required – or is recommended – to be disclosed?” (a topic also recently tackled by Marty Rosenbaum in his OnSecurities Blog.

SEC Agrees to Reduce Penalties in Exchange for Cooperation

The SEC’s new cooperation policy was one of the hot topics during our recent webcast with former senior SEC Enforcement Staffers. Here is news from Ted Levine, Wayne Carlin and Kevin Schwartz of Wachtell Lipton (also available in this memo):

In two recent insider trading actions, the SEC agreed to settlements with substantially reduced civil penalties based on the defendant’s agreement to cooperate with an ongoing investigation and related enforcement action: SEC v. Cutillo et al., No. 09 Civ. 9208 (S.D.N.Y. Mar. 30, 2010) and SEC v. Galleon Management, LP et al., No. 09 Civ. 8811 (S.D.N.Y. Apr. 19, 2010). These cases merit attention as the SEC reportedly considers revising its framework for assessing penalties against entities.

The Commission brought these two actions against Schottenfeld Group LLC — a registered broker-dealer — based on alleged insider trading by individuals who, at the time of the trading, were registered representatives and proprietary traders at Schottenfeld. The SEC is statutorily authorized to obtain civil penalties of up to three times the profit gained or loss avoided as a result of insider trading. Historically, the Commission’s practice in insider trading settlements has been to secure a “one-time” penalty equal to the amount of disgorgement.

In the Cutillo and Galleon actions, however, the Commission submitted and the courts approved settlements that included civil penalties equal to only 50% of the disgorgement amounts. In a joint submission to the court in Galleon, the parties explained that the penalty in that case represented a 50% “discount from a one-time penalty, in exchange for [Schottenfeld’s] agreement to cooperate with the Commission.” The final judgments in both cases stated that penalties in excess of the amounts agreed were not being ordered “based on Defendant’s agreement to cooperate in a Commission investigation and related enforcement action.” While this is not stated explicitly in the filings, the settlements suggest that Schottenfeld may have entered into a formal cooperation agreement, as contemplated by the initiatives announced by the SEC in January. It is also unclear whether the settlements are based on the defendant’s forward-looking promise to cooperate or, rather, are based in whole or in part on cooperation that has already occurred.

The Schottenfeld settlements suggest a willingness on the part of the SEC to extend quantifiable benefits in return for cooperation, at least in some cases. In insider trading cases, a “discount” has verifiable meaning, in view of the historical baseline of one-time penalties. Yet even here, the Schottenfeld settlements do not articulate what the cooperation entailed (or promised for the future), or by what criteria the SEC determined that the appropriate discount level was 50%. In other types of cases, whether a penalty amount is discounted for past or future cooperation is a much more subjective question. As the Commission revisits its framework for seeking penalties against entities, some meaningful transparency from the SEC as to its methodology for determining penalty amounts and discounts is important.

– Broc Romanek