Is Goldman The Victim of 'Fraud' Laws?

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Lloyd Blankfein (Tim Sloan, AFP / Getty Images) 'Fraud' is a generic, vague accusation suggesting wrongdoing without specifying exactly what was done wrong—the very sort of legal vagueness that got Wall Street in trouble in the first place.

The SEC charging Goldman with securities fraud is like the Vatican charging a priest with venial sin. It is the most generic of accusations suggesting wrongdoing without precisely specifying the exact nature of what was wrong. The reason the SEC had to level so vague a charge is that the laws governing (or failing to govern) the kinds of transactions at issue in the Goldman case lack the specificity generally associated with criminal and quasi-criminal prohibitions.

Securities fraud is an accordion-like term that expands and contracts over time, depending on the outrage of the public, the mood of the media, and the discretion of law-enforcement officials. No experienced lawyer could have predicted with accuracy, at the time they were doing it, whether what Goldman is accused of doing would fall on the wrong or right side of the ever-changing "fraud" line—if there even is a line. A good lawyer might have counseled caution and advised there were risks, but if asked the direct question, "Is this fraud under existing law?" she would have had to reply, "I can't be sure."

At the time of the enactment of the Constitution, there was a folksy phrase that was used to describe whether a prohibition was sufficiently clear: The law must be so plain that even he who “reads it while running” may understand it.

As Joe Nocera of The New York Times put it, “What makes it feel like dirty pool is the allegation that Paulson & Company and Goldman Sachs were actively involved in choosing the bonds that would be bet on—knowing they were going to be short. In its filing on Thursday, the SEC charged Goldman never told investors of Mr. Paulson’s involvement.”

To an outsider, what Goldman was doing doesn't pass the smell test, but that's true of much of what passed for investment strategies leading up to the mortgage bubble. Most of these questionable strategies do not fall on the wrong side of the fraud line, though with the benefit of hindsight, perhaps they should now be outlawed. The smell test may be a good cautionary exercise but it is no substitute for clear and precise laws.

• Big Fat Story: Can Goldman’s Chief Survive?• Charlie Gasparino: Goldman’s Dirty Pool• Roger Martin: Goldman’s Shell GameIt seems clear as a matter of business ethics—an apparent oxymoron in the pre-bubble days—that Goldman’s secret use of Paulson to pick bonds he hoped would fall in value, for a fund that was supposed to rise in value, was an undisclosed conflict of interest. Such conflicts should be against the law for banks and hedge funds, as they are for lawyers, but they are not specifically prohibited by current security laws, unless they cross the line into fraud. That, of course, begs the question.

The lack of clear and specific rules, especially regarding conflicts of interest, relegate the SEC to charging generic "fraud," which denies the accused fair warning and substitutes vague tests such as “dirty pool” or “smell,” both of which Goldman fails. The irony is that the last thing the financial community wants is clarity and specificity, since vagueness gives them a competitive advantage.

To be sure, neither Goldman not its vice president has been charged with criminal fraud. Paulson was charged with nothing, though he could easily have been charged with conspiracy to defraud—an even more elastic concept. The only proceeding, at least for now, is a civil lawsuit. But the open-ended concept of “securities fraud” gives rise to both criminal and civil liability. The decision to limit the charge to a civil accusation is a matter of discretion, not law. The conduct for which Goldman is being charged could be criminal as well as civil, despite its vagueness and lack of fair warning.

View as Single Page 12 Back to Top April 17, 2010 | 8:33pm Facebook | Twitter | Digg | Share | Emails | print var OutbrainPermaLink=document.location.href.replace(document.location.search, '').replace(/\/\d+\/$/,'/').replace(document.location.host, 'thedailybeast.com'); var OB_Template = "The Daily Beast"; var OB_demoMode = false; var OBITm = "1255455386150"; var OB_langJS ='http://widgets.outbrain.com/lang_en.js'; if ( typeof(OB_Script)!='undefined' ) OutbrainStart(); else { var OB_Script = true; var str = ''; document.write(str); } Fraud, Goldman, Finance, Fraud Charges, Pope, Investigation, Blankfein, Vatican, Charges, Lawsuit, Sec, Paulson, Goldman Sachs  (–) Show Replies Collapse Replies Sort Up Sort Down sort by date: 123 CarrieAnn

That's venial sin -- with an "i."

Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 10:56 pm, Apr 17, 2010 hockeydog

Good article, with reasonable objectivity on the part of the author. I would like to see some competent source do a background investigation to determine if Mr. Hank Paulson is the cousin, or uncle of this other Goldman Sachs' boy that also figured out a smooth way of fleecing the suckers. Just a hunch, but sometimes, the gypsies share the same father.

Flag It | Permalink | Reply 7:57 am, Apr 18, 2010 mcmchugh99

Wall Street capitalists have destroyed this country with decades of casino capitalism, just as they ruined us in 1929-33.

Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 11:44 am, Apr 18, 2010 sailormoon

yes mcmchugh99,but where are our legislators, our agencies our govt officials,our representatives, our fincial leeaders. We have a huge congress, govt. all over the place,senators, congressmen, legislators lobbyist, eveyone flying all over, getting salaries, and who runs our country?Who watched over the banks, the wallstreets, the gamblers, the ones who handed out free money, and hurt so many. If this huge body of people representing all of us, our wealth, our welfare, our taxes,our economy,our programs, are not resposible,for anything that happens what do we need them for ????????????Wall street does not behave independent than political rules, laws,overseers, who else, is responsible. This is too many screwing everyone else.They all walk free now and wealthy.

Flag It | Permalink 12:22 pm, Apr 18, 2010 Jakeson

Get real....It was the deadbeats who did not pay their house mortgages. Why? Because everyone of those deadbeats were talked into signing a mortgage they COULD NEVER PAY, by Paulson and other WALL STREET BANKERS. How stupid the public is to blame a FEW bankers when the multitude of the problems was local GREED. PURE AND SIMPLE GREED. Greedy people started believing the myth that if you sign a paper for a property they could not pay for that inflation would make the difference. The victims here ARE the bankers who allowed these fools to borrow that much money, OF COURSE AT THE DEMANDS OF THE DEMOCRATS RANGLE, DODD, AND OTHERS LIKE THEM.

Flag It | Permalink 1:18 pm, Apr 18, 2010 mcmchugh99

Jakeson has been watching too much Fox "News" which declares that the bankers are the "victims" of capitalism rather than its directors. For decades, they have been allowed to have their own way on Wall Street, playing Monopoly with the asurance that the federal governmnet would bail them out if they ever got into trouble--and like some hillbilly girl in Kentucky, Wall Street is always bound to get into trouble sooner or later. That's the nature of the capitalist system--cycles of irrational gambling and hysteria followed by crashes and government clean up efforts, util it's time for the cycle to repeat itself. They have just had a big, free market Gold Rush and tried to extract as much money from the suckers and chumps as they could before it all went sour on them. They had a pretty good run at the blackjack table, but those runs always come to an end, and the capitalists know that better than anyone.

Flag It | Permalink 1:45 pm, Apr 18, 2010 darsmind

jakeson & mcmchugh99 - I don't think watching fox has anything to do with this. I'm tired of dismissing everyone's opinion because of the news they watch. Mcmchugh99, I don't start my rebut with, "you watch to much CNN or MSNBC." So lets address the facts. Chris Dodd and Barney Frank are the head of the finance and banking committees. So when laying blame you might want to start there. We all know Dodd got some "preferential" loans and is not running for re-election because his campaign can't withstand the scrutiny. In 1996 Clinton felt that everyone deserved a house. With pressure from the senate Freddie and Fannie along with Wall Street began to relax lending standards. Now you can see where the "local" greed came in, leading us to our current plight. The systemic problem is greed- greed for political power, greed for financial power, greed for a new house, greed for money. Knowing all of this the senate confirms Paulson as chairman of the Fed and the American people are left to wonder who's minding the store. If you're keeping a list of those who share culpability, we have congress, the senate, President's Clinton, Bush and Obama, the FED, Goldman and local banks and lending institutions that promised to never ever get into the sub-prime mortgage market but did anyway. Last but not least, We The People must accept some of the responsibility for not knowing what our government was doing and for being greedy pigs by participating in something that was going to cause the down fall of our economic system. The solution is tough but workable. I would be leery of the Obama Administration writing any legislation since a portion of his cabinet is from Goldman Sachs. I would also wait till some of the people in congress have been removed before coming up with new ideas. finally, the American people need to wake up and look at this issue and help to guide any legislation that impacts our economy. Remember- greed comes from a deficit of character so lets find people of good character to work out these issues.

Flag It | Permalink 4:11 pm, Apr 18, 2010 HiMomItsMe

You seem to be one of the only folks here who understands that the fundamental equation of debt leverage that drives capitalism is BOUND by periodic crashes and resets. That said, I have to call bullshit on your destroyed/ruined framework; the only thing capitalism can "destroy" is the false sense of security and entitlement that capitalism itself creates.

Flag It | Permalink 4:32 pm, Apr 18, 2010 dxgmmpa

mcmchugh99... My reply to you is short. You would are not capable of understanding the long reply because you have no knowledge of what capitalism is nor how it works. I suspect you have no concept of how any other "ISM" works either. The greatness of this country will continue to growth as soon as the voters have a chance to clear up 70 years of progressive government destruction that have stolen my wealth and my children's wealth. This will start in Nov. 2010 and I guarantee it will not take 70 years to fix. My 40 years of hard work with to promise of a better life in old age is what was stolen. It isn't the banks and capitalism that destroyed the country. It is the incessant interference of government into the free market that threatens to destroy it. The constant Interference in the name of social justice, equal distribution of wealth and the pursuit of absolute power. How about guys like you who whine about capitalism start to consider share responsibility, hard work, self reliance, and family. I didn't work 40 years and pay taxes to give it to Obama-money to support some worthless human being that does not want to work and save nor take advantage of a public education but is quick to demand his share of the pie and have his house paid for by my taxes. My reply to you is BULLSHIT...

Flag It | Permalink 12:01 am, Apr 19, 2010 mcmchugh99

Dx, the capitalists have indeed been ripping you off for 40 years because that's the nature of the system, and will continue to do so because they can do nothing else. I don't feel much sympathy for people like you because you allow them to deceive and manipulate you, and therefore deserve everything you get. Capitalism is dead, though--as dead as a doornail, on life support from the government. Obama actually went all out to save it, but that had nothing to do with me. It should have been left to die by its own free market principles. Dx, they only way people like you will finally wake up is if the capitalists take everything from you and push you into absolute poverty and misery. Then you'll see that I was right all along. This is going to happen, I promise you.

Flag It | Permalink 12:26 am, Apr 19, 2010 mcmchugh99

Dx astonishes me, too, in that we're in the worst depression since the 1930s, created by capitalists and their hired politicians in both parties, but he is so helpless and unimaginative that he can do nothing else but defend the very same capitalist system that has just self-destructed. It would be laughable if it weren't so pathetic.

Flag It | Permalink 12:43 am, Apr 19, 2010 thekingofcheap

So Mr. Derschowitz is saying that what they did might have been wrong, but because the law isn't specific enough we should leave Goldman-Sachs alone and change the law to punish future offenders? Mr. Derschowitz, what Goldman did was akin to selling a house doused in gasoline, then buying fire insurance. What else can we expect from the guy who got OJ off and tries to tell the world Israel is a victim, even as the country bombs hospitals in the occupied territories?

Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 6:42 am, Apr 18, 2010 Brother-FLE

"What else can we expect from the guy who got OJ off and tries to tell the world Israel is a victim, even as the country bombs hospitals in the occupied territories?" ???? Sry, but none of this is germaine to the article. From an Irish-Catholis-Union-WhiteGuy

Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 9:59 am, Apr 18, 2010 thekingofcheap

It is germaine, in the sense that he has a record of justifying unethical/inhumane/criminal behavior for certain groups and individuals. As flyoverland points out, Dershowitz may be right about the legal definition of fraud, but then again, the definition of obscenity is pretty vague too -- but ya know what? I know it when I see it! I only wish I believed in hell, that way I'd at least take comfort that Paulson, Geithner, Blankfein and their apologists (like Mr. Dershowitz) would receive justice at the end of a pitchfork -- they're surely never going to receive it in this life ...

Flag It | Permalink 9:49 pm, Apr 18, 2010 flyoverland

I am sure I would not agree very often with the author, however, he is absolutely correct about the way Federal Laws are composed. Our laws seem to be written in such an ambiguous manner to allow each administration the opportunity to interpret them to suit their philosophy. They call this "policy". I call it "mass confusion" and lawyers a full employment act for lawyers. The stop sign is very specific. It means stop. Come to a full halt. Lawmakers should use that model when composing new laws.

Flag It | Permalink | Reply 7:12 pm, Apr 18, 2010 libertyville

Watch and learn as the Chicago Way plays out here. Criticize, ostracize and vilify your targets until you have drawn all the contributions you think can be ill gotten during the squeeze. Then you slap their wrists with a month's worth of bonuses, about $100 million for a Goldman. Having pocketed the proceeds from your friends in that quarter, you move on to the next fat cow. You leave the little people with a toothless bill to satisfy their anger and the big boys carry on.

Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 9:24 am, Apr 18, 2010 AlanD2

Just remember that it's Republicans who are backing Goldman and the rest of the financial industry, libertyville.

Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 10:37 am, Apr 18, 2010 dalelama

No actually GS gave more to the Dems this past election cycle with Hllary #1 and the Village Idiot #2. The Dem's dirty little secret is they get more $ from Wall St bankers than the Repubs. Why do you think the Dem majority supported TARP and the Repub majority was against it?

Flag It | Permalink 5:54 pm, Apr 18, 2010 Lilli917

Aren't you confusing this with the Bush-Cheney methods? It sounds so familiar.......maybe we've already been through that.

Flag It | Permalink | Reply 10:57 am, Apr 18, 2010 Skipper58

One billion is chicken feed to GS. The only thing these banksters really fear is jail time. That means criminal charges must be laid.

Flag It | Permalink | Reply 12:31 pm, Apr 18, 2010 dabouv

When I see the "Chicago Way" it makes me realize you are an idiot. You could have the right wingers label him anything they want and you would find idiots who would echo it. What's next, you'll be saying he is a fascist, communist, socialist, a Muslim, Un-American? Maybe you'll say he can' get anything done or that he is pushing through the most leftist agenda in American history? I think we know which party Wall Street favors although I would agree that the moral authority that the Dems speak with is only a whisker better than the Reps here. I think we need to go back to very high almost punitive tax rates above a certain rate. There is no way else to get rid of the greed. Certainly there should be a difference between the tax burden of someone who has risk vs. someone who doesn't. We have just seen some hedgefund managers makes billions/year. We have CEO's making 10 and 100,000,000 a year. I think that it would be far better to have CEO's who stayed with companies for a log time and were well payed but not obscenely paid. That is bad for business when you make enough in 1 year that you and 3 generations are set for life. There is no way a hedge fund manager should be making 4 billion a year and if there was a return to much higher tax rates on really high incomes we wouldn't see near this much crap going on.

Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 12:32 pm, Apr 18, 2010 dalelama

Uhh actually judging by campaign contributions Wall St. favors the Democrats. The top 1% pays 50% of all federal income tax while the bottom 47% pay zero. And there is no doubt Obama is a socialist at a minimum. I suggest before you call anyone else an idiot you take a hard look in the mirror.

Flag It | Permalink 5:59 pm, Apr 18, 2010 stevelaudig

We don't really expect much from Dershowitz any more do we? He's a has been since Von Bulow. I suspect that he has family and personal or social connections with most of the large financial firms that create conflicts of interest that Mr. Dershowitz would not fall over himself telling the readers of this column about. He's no longer a defender of personal rights if they belong to Palestinians or rank and file Main Street America. Mr. Dershowitz is a deep pockets lawyer, he'll rep the deep pockets. This column reads like a sales pitch to Goldman to do their defense.

Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 9:53 am, Apr 18, 2010 thekingofcheap

Dershowitz is an organism who subsists by licking up the scum of the earth.

Flag It | Permalink | Reply 9:51 pm, Apr 18, 2010 HankWil

I'm sorry but with this White House and the timing of the charges, given their history of the willing media to help "set the table", I think the more suspicious thing here is that these particular charges came at this particular time when the Pres' boyz are having a hard time getting the next power grab past the Republicans. This group doesn't know how to do a deal without putting a kink in it, brand on it, or ie, lying when the truth sounds better. In this case of course, this is just another "setup" to get Public support by vilifying Wall St, which is easy, so they can get the Republicans to roll over yet again. Yet another scam. All this falderall is only to obfuscate and mask the true objective which is to give the Pres more power over the private sector under the guise of "reform". If I didn't think better, I would say this is very evil. In this case, whether it is or not, I think it is just the way they do business. Everyone with a brain can see this AND the fact that "fault" for the beginning of the financial crisis WE ARE IN began with the failure of the Gov agencies to do their job in the first place, bureaucrats! Now, in some kind of weird twilight zone where the timing of that coincided with this inept scammer becoming President with his gang of theives to take advantage, they want to set it up in perpetuity where they control the private money centers AND without any accountability or transparency. Anybody tell me exactly where the missing 180 Billion from the original TARP is? Please..........what BS! So don't get hung up on ol' Dersch here getting his jollies on you-all's heads by forgetting what the purpose of all this is!

Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 10:14 am, Apr 18, 2010 Lilli917

So, what would you have done with this mess?

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