Goldman Sachs Has No Villains!

Why is it that the more widespread a financial crisis is, the fewer people are prosecuted for malfeasance? No senior executives were named in the Goldman Sachs suit. Is it that regulators were not doing their jobs and did not collect evidence needed for prosecutions? Is it that there are not enough people available to investigate and prosecute the enormous numbers of culpable people responsible? Or is it, like Fuld says, the fault of the government and Wall Street conspiracies? The problem in this financial crisis is not a dearth of villains, it's the plethora of villains who will continue to go unnamed.

Where Are All the Prosecutions From the Crisis?
White Collar Watch. The New York Times
Peter J. Henning follows issues involving securities law and white-collar crime for DealBook’s White Collar Watch.

A consistent question since the financial crisis in 2008 is why has the federal government not prosecuted any senior executives for their roles in the collapse of firms like Lehman Brothers and Bear Stearns or the risky investments that led to bailouts of onetime financial giants like the American International Group, Fannie Mae and Freddie Mac. How can companies worth billions of dollars just a few months earlier suddenly collapse in 2008 without someone being held responsible?

At a hearing before the Senate Judiciary Committee last week, Senator Ted Kaufman of Delaware summed up the frustration on Capitol Hill with the lack of any identifiable villains for the financial troubles of the last two years. “We have seen very little in the way of senior officer or boardroom-level prosecutions of the people on Wall Street who brought this country to the brink of financial ruin,” Mr. Kaufman said. “Why is that?”

Judge Ellen Segal Huvelle of the Federal District Court in Washington expressed similar frustration with the settlement between the Securities and Exchange Commission and Citigroup over the bank’s misstatements in 2007 regarding its exposure to subprime mortgage-backed securities. In its complaint, the S.E.C. refers repeatedly to “senior management” receiving information about increased losses in its portfolio from problems with subprime mortgages, but none were named in its complaint.

Although Judge Huvelle largely approved the settlement, she was confounded by the S.E.C.’s failure to at least identify which Citigroup executives were aware of the information. The judge said that “this is where the S.E.C. is doing a disservice to the public” by not providing any more details, or even charging executives for misleading shareholders.

Judge Huvelle also questioned the deterrent impact of the $75 million penalty the company will pay, or the similarly modest $100,000 and $80,000 penalties imposed in a separate administrative proceeding on two Citigroup officers for their roles in the company’s disclosures. She pointed out that “$75 million will not deter anyone from doing anything,” and that “a $100,000 fine is not a deterrent in corporate America to do a better job.”

At the Senate hearing in which Senator Kaufman questioned the dearth of prosecutions of senior executives, Robert Khuzami, director of enforcement at the S.E.C., testified that his agency has been much more aggressive in pursuing cases against Wall Street. He cited as one example the securities fraud charges filed against Goldman Sachs in April that the firm later settled for $550 million.

Like the Citigroup matter, however, the Goldman case did not name anyone in the firm’s senior management as a defendant, with only a lower-level trader, Fabrice Tourre, sued in the complaint. And in both cases the settlements involved an alleged violation of Section 17(a) of the Securities Act of 1933, which is the lowest-level fraud charge the S.E.C. can bring because it only entails negligence rather than intentional conduct.

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