The SEC has announced that Goldman, neither confirming nor denying wrongdoing but admitting that information given with regard to the sale of derivatives was "incomplete," has agreed to a $550 million settlement, $300 of which is a fine, the rest in restitution.  The settlement also contains an agreement by Goldman not to violate any securities laws in the future, the financial firm equivalent of teenager deferred adjudication.  The SEC would like us to note two things about this settlement, which must be approved by the court:  (1) it is the largest amount ever paid by a single financial firm (compare to the $1.5MM Global Settlement of Analyst Conflicts paid by 10 firms in 2003) and that (2) this sends a message.  Retribution and deterrence, all in one.  In fact, the sound bite being circulated from Robert Khuzami, Deputy Director of Enforcement is:

This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing."

I think this statement should have been worded differently. Here's why.  First, what are the fundamental principles of honest treatment and fair dealing under the federal securities laws?  This sounds like the state law duty of good faith and fair dealing.  And, Goldman's actions, providing incomplete information in marketing materials for the sale of derivatives, may or may not breach the duty of good faith and fair dealing.  If the SEC's lawsuit had been successful, it would have been because Goldman violated Section 17 (even by a negligent misrepresentation that had the effect of fraud) or Section 10 (b) (fraud).  Why muddy the waters by circulating a statement with inexact terms like "honest treatment" and "fair dealing" which don't appear in the Exchange Act?

I've been waiting for a reason to compare the Goldman enforcement action against the private lawsuit Proctor & Gamble Co. v. Bankers Trust Co. (S.D. Ohio 1996).  Remember, in the early 1990s, derivatives were blamed on a lot of things, including the insolvency of Orange County.  P&G also lost a lot of money on interest rate swaps it entered into with BT.  Tragedy ensued, and a lawsuit was filed.  But the court would have none of it.  First, the court said, the interest rate swaps at issue were not securities, so forget the Exchange Act.  Then, the court also said that the swaps were exempt under the Commodities Exchange Act.  Then the court said that the parties were not fiduciaries to one another and therefore no fiduciary duties existed between them.  However, the court held that the state of New York imposed the duty of good faith and fair dealing on the parties in connection with their bargained-for contract.  Under NY case law, a duty to disclose would only arise if (1) a party had superior knowledge of certain information; (2) that information was not readily available to the other party; and (3) the first party knew that the second party was acting on the basis of mistaken knowldge.  And, the court held that in NY there is no cause of action for negligent misrepresentation in the absence of a special relationship and that a contractual relationship between two sophisticated financial institutions would not create that special relationship.  The claims were all dismissed except for the claims under the duty of good faith and fair dealing, which would require fact finding.  There, we might have cared about the complexity, the sophistication of the parties, the honest treatment and fair dealing.  However, the case then settled.

Why is Goldman a different case?  Because it's not a private lawsuit, but an SEC action brought under just the securities laws.  Here, the instruments at issue are securities or securities-based swaps, so the SEC can enforce through federal securities laws, but not state law good faith and fair dealing.  Why is the SEC talking about honest treatment and fair dealing?

Last point.  Is this really a retribution victory?  Even if it is a $550 million payment, the largest ever by an individual firm?  Goldman Sachs is the 39th largest company in the U.S. according to Fortune magazine.  Last year, it had $13 billion in profits.  It's bonus pool was half its revenue, $16 billion.  I guess whether $550 million is a big penalty is not a rhetorical question, it's an empirical one.  Today, Goldman's stock went up almost 4.5%.  Let's compare that to the S&P 500:

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