Corporate Governance

The Goldman Case and the Inspector General: Exoneration for the SEC

By J Robert Brown Jr.

The Inspector General issued a 77 page report containing the results of an investigation into the timing of the Goldman case.  The report entirely exonerated the SEC.  The report examined whether:

• SEC employees communicated or coordinated with the White House, Members of Congress, or Democratic political committees concerning the bringing, or the timing of bringing, an action against Goldman Sachs & Co. ("Goldman"), prior to the April 16, 2010 filing by the SEC Division of Enforcement of the SEC's complaint against Goldman, in order to affect debate of the financial regulatory reform legislation pending before the United States Senate.

Eventually the allegations were expanded to include the settlement with Goldman.

• On July 22, 2010, Congressman Issa requested that the OIG broaden its investigation to examine whether the timing of the Commission's proposed settlement with Goldman related to either the financial regulatory reform legislation passed by the United States Senate the same day or to the minimization of leaks of information to the media concerning the proposed settlement.

The allegations were serious.  They suggested that the Commission presumably influenced or pressured by politicians to time the filing of the Goldman case to influence the debate on financial reform.  This sort of behavior is inconsistent with the SEC's structure as an independent agency.  

The allegations came from Congressman Issa in a letter to the Inspector General.  There is a link to the letter in the post here.  The support for the investigation in the Issa letter included the split at the Commission in approving the case, the indication that the New York Times had advanced notice of the suit, actions shortly after the case was filed taking advantage of the suit (the DNC apparently arranged to have an ad appear whenever someone did a search using the phrase "Goldman Sachs SEC"), Democrats in Congress who "heralded" the suit as a boost for their case for legislation, and questions asked by members of the media whether the Administration had advance notice of the suit.

Most were unrelated to whether the case was timed to promote financial reform.  Leaks to the NYT (which could just as easily have come from persons connected to Goldman) did nothing but reveal the case a bit early.  In other words, the leak had nothing to do with the timing of the action inside the SEC.  The other bits of information all occurred after the case was made public. 

Taking the allegations at their worst, they suggested leaks before the case was announced.  The possibility of leaks have no bearing on the Commission's determination of the timing of the case.  Moreover, leaks occur all the time.  Plenty of people know about these cases before they are made public, including the private parties (and their advisors) and, sometimes, other agencies conducting investigations.  To commence an investigation every time someone alleges a leak occurred would result in the OIG doing nothing but investigating leaks.

So what was the conclusion of the Report?

• The OIG has not found evidence indicating that the SEC coordinated its investigation of, or its action against, Goldman with the Executive Office of the President, the White House, any White House employees, any Member of Congress, any Congressional employee, the Democratic National Committee, the Democratic Senate Campaign Committee, the Democratic Congressional Campaign Committee, or any of their employees.

How about the settlement?

• The OIG investigation also found no evidence indicating that the SEC coordinated the settlement of its action against Goldman with the Executive Office ofthe President, the White House, any White House employees, any Member of Congress, any Congressional employee, the Democratic National Committee, the Democratic Senate Campaign Committee, the Democratic Congressional Campaign Committee, or any of their employees. The OIG found that settlement negotiations and approval proceeded independently of any other governmental entities, any legislation, or any political entities.

What about the leaks to the NYT? 

• Further, after an extensive search of the e-mails of dozens of SEC employees who may have played a role in, or known about, the Goldman action, and taking the sworn testimony of dozens of these employees, the OIG has not found evidence demonstrating that anyone at the SEC shared information about its Goldman investigation with the media prior to the filing of its action against Goldman on April 16, 2010.

Complete exoneration in short.  It was no surprise given the allegations that led to the investigation.

Full post as published by The Race to the Bottom on October 19, 2010 (boomark / email).