Blankfein Take Heart: Fraud-Tarred Firms Rarely Fire a Leader

Goldman Sachs Group Inc. Chief Executive Officer Lloyd C. Blankfein may take comfort from Wall Street’s legal history: Even after being sued for fraud by regulators and paying multimillion-dollar fines, the biggest financial firms rarely depose their leaders.

Citigroup Inc., Goldman and Merrill Lynch & Co. were among 10 firms that agreed to pay $1.4 billion in 2003 to settle claims that analysts manipulated recommendations. Not one CEO lost his job over the claims. There was a similar result in 2006, when Citigroup and Goldman Sachs were among lenders that paid $13 million for manipulating the market for auction-rate bonds.

That same year Bear Stearns Cos. paid $250 million to settle SEC claims it had helped clients break mutual-fund trading rules. CEO James “Jimmy” Cayne didn’t just keep his job -- he accepted a total 2006 payout of almost $34 million.

“It’s now very, very unusual for the CEO to be forced out unless he was directly involved in the behavior,” said James Coffman, who retired as an assistant director of enforcement at the SEC in 2007 after a nearly three-decade career at the agency.

Not every Wall Street chief has survived an SEC case. Bank of America Corp. CEO Kenneth Lewis announced his exit in September, a month after the SEC sued the bank, saying the decision was his alone. John Gutfreund left in 1991 as CEO of Salomon Brothers Inc., where he had spent 38 years, after allegations it had manipulated a U.S. Treasury bond auction. The firm later paid a $290 million fine.

Photographer: Andrew Harrer/Bloomberg

Goldman Sachs CEO Lloyd C. Blankfein's future may be determined by the company board in New York. Close

Goldman Sachs CEO Lloyd C. Blankfein's future may be determined by the company board in New York.

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Photographer: Andrew Harrer/Bloomberg

Goldman Sachs CEO Lloyd C. Blankfein's future may be determined by the company board in New York.

‘Fell on My Sword’

 “Our lawyers said I shouldn’t resign, but I fell on my sword to save the company,” the 80-year-old Gutfreund, who paid a $100,000 fine himself, said in an interview this week. “I felt the company was in jeopardy and that I could protect it by leaving, and that’s what they would have to think about” at Goldman, he said.

Salomon later said that it had fired Gutfreund, the New York Times has reported.

For Blankfein, 55, the predicament may be different because of the volume of public anger, media scrutiny and political hostility in the wake of the worst financial crisis since the Great Depression.

“Goldman is going to have to pay a high price for its ineptitude in handling this issue,” Rochdale Securities LLC analyst Richard Bove wrote in a May 2 report. “High-level executives are going to have to be removed from their positions both in the management suite and from the board of directors.” Bove nevertheless recommends investors buy shares of “the best trading company in the world.”

Goldman’s Reputation

Blankfein’s future may be determined by the board at New York-based Goldman Sachs and its assessment of whether he can manage the litigation, the public and Congress without damaging the firm’s reputation or share price, said Jennifer Arlen, a New York University Law School professor and who specialized in the prosecution of corporations. Blankfein would be forced out only if directors decide his resignation is the sole way to restore the firm’s credibility, she said.

“The question for the board is if they believe Goldman is being pursued for political reasons or if management is mismanaging the process and needs to be replaced,” Arlen said. “They have faced so much anger that you have to ask, how could this get so far? Did the executives mismanage the process or is this just a hostile environment? That’s the question for the board.”

Blankfein’s Defense

Blankfein, who was among Goldman Sachs executives grilled at a Senate hearing last week, says his firm did nothing wrong and had no duty to tell customers who bought a collateralized debt obligation that the bank was betting against the security. Goldman Sachs calls the claims “completely unfounded in law and fact” and said it would “vigorously contest them and defend the firm and its reputation.”

Since 2001, when the SEC said companies that promptly disclose suspicions of wrongdoing and cooperate with investigators may receive lighter penalties, CEOs have been forced out only when they were personally involved in improprieties or if the misdeeds were systematic or involved a failure to supervise properly, said Joseph Grundfest, a former SEC commissioner who is now co-director of Stanford University’s Rock Center for Corporate Governance.

“I just don’t see the vectors lining up for Lloyd Blankfein to step down unless there is new information that changes that perspective,” Grundfest said.

Game Changer

That could change if government authorities decide to bring criminal charges against Goldman Sachs. Arthur Andersen LLP surrendered its accounting license after being convicted in 2002 of shredding documents relating to the Enron Corp. scandal. Drexel Burnham Lambert Inc. filed for bankruptcy in 1990, a year after the firm pleaded no contest to six felony counts and paid a $650 million fine to settle an SEC fraud suit.

“Criminal charges are the game changer,” said Gerald Rosenfeld, deputy chairman of Rothschild North America Inc. and co-head of the business and law program at New York University. “If Goldman were to be criminally charged, then all bets are off. It’s sort of a truism on Wall Street that no securities firm can survive in such a regulated industry if the firm is indicted.”

To contact the reporter on this story: James Sterngold in New York at jsterngold2@bloomberg.net.

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