Wall Street Investigations

How Big a Hit Will Goldman Take?


As the U.S. Securities & Exchange Commission wrestles with Goldman Sachs (GS) to settle fraud charges, it will be under pressure from lawmakers and the public to punish the Wall Street giant with a fine that some legal analysts predict could be $1 billion or more. "There's been a lot of attention paid to this on Capitol Hill and in the press," says James Coffman, a former SEC attorney who negotiated a $300 million settlement with Time Warner (TMX) in 2005. Coffman predicts Goldman Sachs will pay "about $100 million or more" in any accord it reaches with the SEC. Others think the tab will be higher. "The goalpost is $1 billion, minimum," says James Cox, a securities law professor at Duke University. That would be the biggest settlement ever by a financial company.

In preliminary settlement talks between the SEC and Goldman Sachs, the subject of how much money the firm may pay hasn't been discussed, according to a person familiar with the matter. SEC spokesman John Nester and Goldman Sachs spokesman Michael DuVally declined to comment.

The SEC's Apr. 16 lawsuit accused Goldman Sachs of fraud for not disclosing that Paulson & Co. picked the underlying securities in a collateralized debt obligation that the hedge fund planned to bet against. Goldman Sachs received about $15 million in fees while investors in the CDO lost more than $1 billion, the agency said. Goldman Sachs has denied any wrongdoing in the deal.

The SEC suit cites the Securities Act of 1933 and the Securities Exchange Act of 1934. Both laws limit their most severe fines to either $650,000 per violation or the "pecuniary gain" reaped by the defendant. According to former SEC Commissioner Paul Atkins, SEC investigators don't have to follow those limitations if they: persuade companies to pay more; a majority of agency commissioners vote to approve a settlement; and a judge signs off on the pact. "It's basically what the two sides hammer out," Atkins says.

Negotiations are more likely to stall over the terms of a settlement than the size of any fine, said two people familiar with Goldman Sachs's thinking. Goldman Sachs would resist agreeing to an accord that said it committed fraud because doing so could affect the firm's business, the people said. Such a settlement likely would restrict Goldman Sachs and its employees from managing investment companies registered with the SEC. Goldman Sachs' asset management unit oversees mutual funds, money-market funds, and bonds funds. "Money hurts, but limitations on business can hurt in a lot more ways and that can be the hurt that keeps on giving," said Coffman, who retired as an assistant director of enforcement at the SEC in 2007.

The SEC may press Goldman Sachs to agree in future transactions to improve its disclosures to sophisticated clients like the firms that invested in the CDO, says Elizabeth Nowicki, who teaches securities law at Boston University. "That would actually be a far bigger win for the SEC" than a one-time penalty because it would likely lead to industrywide reform, she says.

The bottom line: Even a big fine won't dent a powerhouse like Goldman. Admitting fraud, however, could damage its reputation and drive away clients.

Scheer is a reporter for Bloomberg News.
Westbrook is a reporter for Bloomberg News in London.

Later, Baby
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