April 30, 2010
Goldman, Sachs: The Criminal Investigation
Posted by Christine Hurt

So, the other shoe dropped today when it was announced that the Department of Justice is investigating Goldman, Sachs.   (Informative Washington Post story here.)  This can only be good news for the SEC.  Now, the SEC can let the DOJ use all of its tricks -- persuading the Goldman board that cooperation is in it's best interest, persuading Goldman employees to cooperate, before the SEC has to move forward.  At the end of the day, should anyone enter into a plea agreement, that person can enter into a settlement with the SEC at the same time.  The SEC doesn't have to find out if they can survive a motion to dimiss in civil court.

O fcourse, we don't kno wmuch about the investigation.  According to the WSJ, the investigation may be about other transactions, not the ABACUS 2007-AC1.  We don't know if the investigation will target Goldman for entity-level liability or trade entity-level liability for information about particular individual defendants.

The WSJ ominously reminds us that in recent memory, no "major financial firm" has survived "criminal charges." Of course, this statement assumes that charges are brought at the entity level.  Many firms survive charges levied against individual officers of the firm, so it's not unthinkable that a financial firm, even Goldman, would survive that.  Also, this statement assumes charges or an indictment, and not just an investigation with some sort of settlement.  The WSJ article mentions deferred prosecutions against firms, particularly accounting firms.  But there have been other sorts of settlements.  The 2003 Global Settlement of ten major Wall Street firms after investigations by the SEC and the NY attorney general would be one example.  No charges were brought, but these firms survived the settlement (although they may not have survived more recent events).

Both the Post story and the WSJ story make the point that criminal cases are harder to win because of the "reasonable doubt" standard.  However, this argument ignores all of the other effective tools that a prosecutor has to leverage its case.  For more on the prosecutorial advantages in white-collar cases versus civil securities fraud cases, see The Undercivilization of Corporate Law.

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