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SEC Said to Vote 3-2 to Sue Goldman Sachs Over CDOs (Update2)
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By Jesse Westbrook

April 19 (Bloomberg) -- The U.S. Securities and Exchange Commission split
3-2 along party lines to approve an enforcement case against Goldman Sachs
Group Inc. <http://www.bloomberg.com/apps/quote?ticker=GS%3AUS>, according
to two people with knowledge of the vote.

SEC Chairman Mary
Schapiro<http://search.bloomberg.com/search?q=Mary+Schapiro&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>
sided
with Democrats Luis
Aguilar<http://search.bloomberg.com/search?q=Luis%0AAguilar&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>
and Elisse Walter<http://search.bloomberg.com/search?q=Elisse+Walter&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>to
approve the case, said the people, who declined to be identified because the
vote wasn’t public. Republican commissionersKathleen
Casey<http://search.bloomberg.com/search?q=Kathleen+Casey&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>
and Troy Paredes<http://search.bloomberg.com/search?q=Troy+Paredes&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>
voted
against suing, the person said.

Schapiro, an independent appointed by Democratic President Barack
Obama<http://search.bloomberg.com/search?q=Barack+Obama&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>,
cast the deciding vote in a high-profile case for the second time this year.
In February, she sided with Democrats in a $150 million settlement with Bank
of America Corp. <http://www.bloomberg.com/apps/quote?ticker=BAC%3AUS> tied
to its takeover of Merrill Lynch & Co.

“She’s not worried about consensus because ultimately, this case is going to
be decided by a jury trial,” said Peter
Henning<http://search.bloomberg.com/search?q=Peter%0AHenning&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>,
a former federal prosecutor and SEC attorney who teaches at Wayne State
University Law School in Detroit. “It might help Goldman a little bit in the
public-relations battle to show that there is division.”

The SEC on April 16 accused Goldman Sachs, the most profitable company in
Wall Street history, of creating and selling collateralized debt obligations
in 2007 tied to subprime mortgages without disclosing that hedge fund
Paulson & Co. helped pick the underlying securities. Goldman Sachs also
didn’t disclose to investors that Paulson was betting against the
securities, the SEC said.

SEC spokesmen John
Nester<http://search.bloomberg.com/search?q=John+Nester&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>
declined
to comment.

Public Outrage

Goldman Sachs said in a statement last week that the SEC’s allegations are
“completely unfounded in law and fact.” The company said it will
“vigorously” contest the case and “defend the firm and its reputation.”

The company became emblematic of public outrage at the banking industry
after posting a record $13.4 billion profit in 2009, a year after receiving
$10 billion in U.S. aid during the financial crisis. It repaid the funds in
June. The company, led by Chief Executive Officer Lloyd
Blankfein<http://search.bloomberg.com/search?q=Lloyd+Blankfein&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>,
55, has been criticized by lawmakers for issues from pay practices to
helping Greece mask the size of its debts.

Goldman Sachs plunged 13 percent on April 16 after the SEC announced its
case. The shares rose $2.62, or 1.6 percent, to $163.32 at 4 p.m. in New
York Stock Exchange composite trading.

Bucked Consensus

Schapiro, 55, has bucked consensus in approving enforcement cases and new
regulations. In February, she joined Aguilar and Walter in 3-2 votes for
rules to restrict on bearish stock bets and to encourage companies to
disclose how climate change may alter financial results.

The vote on short-sale restrictions prompted Erik
Sirri<http://search.bloomberg.com/search?q=Erik+Sirri&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>,
a former head of the SEC’s division of trading and markets under Schapiro,
to say the agency made a political decision rather than one based on market
data.

Schapiro’s predecessor, Christopher Cox, tried to seek consensus on SEC
actions, triggering criticism from investors that he wouldn’t take on
contentious cases or rules. Cox stepped down as SEC chairman in January
2009.

Goldman Sachs, which reports first-quarter earnings tomorrow, was warned
nine months ago by the SEC that agency investigators wanted to bring a case,
people with direct knowledge of the talks said. The company made
counter-arguments in response to the so-called Wells notice before
disclosing to investors in March that it was cooperating with regulators.

The SEC didn’t tell the company that it planned to file its suit on April
16, which Goldman Sachs interpreted as a sign the agency has become
unusually adversarial, according to a person close to the firm.

To contact the reporter on this story: Jesse
Westbrook<http://search.bloomberg.com/search?q=Jesse+Westbrook&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>
in
Washington [email protected].
*Last Updated: April 19, 2010 17:28 EDT*
--
Eric D. Schwerin
Rosemont Seneca Partners
(202) 333-1880
[email protected]