Goldman Sachs CDO Lawsuit Split SEC Commissioners in 3-2 Vote

Mary Schapiro, chairman of the U.S. SEC
Mary Schapiro, chairman of the U.S. Securities and Exchange Commission, speaks during the Women in Finance Symposium at the Treasury Department in Washington, D.C., on March 29, 2010. Photographer: Andrew Harrer/Bloomberg

The U.S. Securities and Exchange Commission split 3-2 along party lines to approve an enforcement case against Goldman Sachs Group Inc., according to two people with knowledge of the vote.

SEC Chairman Mary Schapiro sided with Democrats Luis Aguilar and Elisse Walter to approve the case filed on April 16, said the people, who declined to be identified because the vote wasn’t public. Republican commissioners Kathleen Casey and Troy Paredes voted against suing, the people said yesterday.

Schapiro, an independent appointed by Democratic President Barack Obama, 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. 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, 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 accused Goldman Sachs, the most profitable firm in Wall Street history, of creating and selling collateralized debt obligations 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 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, led by Chief Executive Officer Lloyd Blankfein, 55, said it will “vigorously” contest the case and “defend the firm and its reputation.”

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

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 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, 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.

Sought Consensus

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 today, 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.


Before it's here, it's on the Bloomberg Terminal. LEARN MORE