PPT

Goldman Sachs Fraud

University of Maryland University College

Goldman Sachs Securities Fraud Case

Goldman Sachs deceived its investors by refusing to reveal the evident conflict of interest that came up on mortgage investment with the housing market. Charges were brought into light by the Securities Exchange Commission against Goldman. According to the charges, Goldman had performed unlawful action that was fraud by trading of the illegal subprime mortgage securities. In defense, Goldman Sachs stated that they were just following their normal business performance and committed no wrong doings. The fraud case of Goldman extracted serious issues that portrayed the insufficiency of investment banking. This legal ordeal that took about three months erased almost $20 billion of Goldman’s stock-market value (Stanley, 2013)

The fraud

The government accused Goldman Sachs Securities of defrauding its investors through failing to reveal the conflicts that arose concerning the mortgage investments that it sold even though the housing market was undecided. According to the Securities and Exchange Commission (SEC), that announced civil fraud against the Wall Street powerhouse, Goldman refused to disclose that one of its customers assisted in creating subprime mortgage securities that unfortunately were devised to fail. The SEC notes that those who invested in the subprime mortgage securities are reported to have lost over one billion dollars

The cases of Goldman entailed four structures of securities that played particular roles amid financial downturn in 2008: One, residential mortgage-backed securities (RMBS) that embodied a security form that was derived from pooling mortgages on real-estate that were residential into bonds; collateralized debt obligation (CDO) which represented a debt security collateralized by obligation of depts.; credit-default swap (CDS) that represented an insurance policy form ; and, synthetic CDO’s that were equivalent to ordinary CDOs (Stanley, 2013) .

According to the SEC, Goldman and some of the top officers in the Company deliberately misled investors though failing to disclose that John Paulson, who was a hedge fund manager, and one that made billions managed through selecting the house market that were called Abacus. Goldman was paid roughly 15 million dollars by Paulo & Co. for structuring the deals that happened in 2007. This fraud claim drastically made the shares of Goldman to fall by 10% after SEC made the announcement (Stanley, 2013).

The civil lawsuit that was filed by the SEC in the federal court situated in Manhattan is one of the government's most important legal actions that relate to the mortgage meltdown which started the financial crisis and further helped thrust the country into downturn. This agency has also charged Goldman Vice President, Fabrice Tourre, for devising the illegal deal as well as for marketing those securities

Goldman Sachs incorrectly allowed a customer to influence and have control over mortgage securities to include an investment assortment and also inform the other investors that the securities that were traded were properly backed by an independent, third party. According to the SEC, Paulson & Co. wanted the services of Goldman Sachs to make a deal that Paulson & Co. could assume short positions over mortgage securities that was selected by Paulson & Co. on belief that the traded securities could encounter any credit events.

The corporation and/or government response

Even though Goldman refused to formally admit to the allegations of the SEC, the company did agree to a judicial order that barred it from committing any more international fraud, as per the federal securities laws. Additionally, there was an acknowledgement from Goldman that the abacus marketing materials had information that was not complete. Goldman also agreed that it had made a mistake in failing to disclose the role of Mr. Paulson. The bank further regretted of containing marketing materials that was not disclosed. Goldman further began holding talks of settlements with the SEC after the filing of the complaint. More concerns continued to be hard from executives and clients regarding Goldman as days continued to pass. Even though the SEC seemed to not bring more cases on Goldman, more investigations on collateralized department obligations are still underway, and therefore the bank could still face some actions (William, 2012).

According to Reuters, an online article, the United States Justice Department promised not to pursue the criminal charges that had been filed against Goldman Sachs Group Inc. The United States Justice Department also promised not to file any criminal cases against Goldman’s employees that have been linked to the accusations of fraud. This decision of not prosecuting Goldman, a firm that has been held up by critics as a mark of Wall Street greed in the financial crisis that took place between 2007 and 2009, clearly shows the complexity in prosecuting cases that are crisis related (Doyle, 2012).

A good number of people would have expected this bank to face criminal charges, Nevertheless, Senator Carl Levin from US asked for a criminal investigation to be conducted on the back in 2011. This order was after the subcommittee, that he leads, spent over a year looking into the case of Goldman. The accusations were heard in a very heated Congressional hearing in 2010, where Levin interrogated the Chief Executive Officer of Goldman, Lloyd Blankfein, concerning if it was ethically right for the firm to sell products of its clients that were described as "crap" internally (Bryant & Bryant(2003).

The Justice department and the investigative agencies eventually concluded that there lacked enough poof to bring a criminal case on Goldman because of the laws and facts as they existed at the time. The Department of Justice never makes public statements after concluding an investigation. According to Neil Barofsky, an investigative agent for the U.S. government, there is no individual or any organization that had been held accountable for the financial crisis.

According to the complaint of the SEC, Paulo & Co made payment to Goldman Sachs that was about $15 million for publicizing and building ABACUS. The investors that were involved in ABACUS reportedly lost over a billion dollars. The complaints of the SEC did charge Goldman with contraventions of Securities Act, Section 17, Securities Act 1934(10b), and also Exchange Act Rule 10b. These charges under commission involved disgorgement of profits, injunctive relief, prejudgment interests, as well as financial penalties (Bryant & Bryant 2003).

Goldman Sachs responded to that filed suit by agreeing to settle with a very big penalty that was the largest to be ever made in the history of Wall Street. Goldman said it would settle the penalty that was handed out that mounted to 550 million dollars. These penalties were a response to the charges about the swindling of client through the mortgage securities that were secretly made by the hedge fund with an aim of redeeming the crumple of the housing market (Doyle, 2012).

In response to the filed suit, Goldman agreed to settle one of the biggest penalties handed out in Wall Street history. The company agreed to settle the handed out penalty of $550 million in response to the charges that it swindled clients by trading mortgage securities that were wrongly structured by a hedge-fund unit to gain an advantage on the housing market’s downfall. The agreement with the SEC brought to an end the drama that had considerably damaged this very influential financial firm in America at a charge that onlookers could only identify as a bargain.

Core issues that were behind the fraud

To begin, Goldman Sachs did admit that it had committed a grave mistake through failing to reveal the deeds of Paulson & Co to the investors for the deal that was labeled ABACUS 2007. Goldman Sachs did deceive the investors through portraying that the ACA had picked the assortment, without disclosing principal role of Paulo in creating that portfolio and its detrimental and contradictory economic welfares (Bodine, 2013) .

The marketing materials of Goldman for ABACUS were also considerably misleading owing to the fact that they portrayed that ACA selected the reference portfolio while it excluded mentioning that Paulson was a party to that deal whose economic interest were unfavorable to investors, hence played a crucial function in the selecting of that traded portfolio. Using an example, there was a document of about nine pages that was detailing that ABACUS was organized by Goldman Sachs in February 2007, delineated ACA as Portfolio Selection Agent and further outlined that ABACUS portfolio was selected by the ACA (Bodine, 2013).

The document did not carry declaration of Paulson in any way, its financial interest inside the transaction, or its purpose in selecting the orientation portfolio. Goldman misled ACA into believing that Paulson was a long equity, and that Paulson was carrying out financial resources in equity of ABACUS. The equity trance was principally at the capital structure base and the leading experience lost links to corrosion inside the act of the instrument (Bodine, 2013).

Personal analysis

Even though the penalties that were handed out to Goldman can be viewed as creditable, it was still not sufficient to make sure that an occurrence like that will never be repeated. After the suit was settled, Goldman Sachs did declare that it has an intention of reinforcing an oversight of the mortgage securities. It was quite a disappointment that Goldman just had to be let go with several victories that brought about doubts concerning the potential of the case presented by SEC (Bodine, 2013). Goldman still remained not bounded to give up any of its executive management, which included its Chief Executive. There were changes that the bank did agree to effect as long as that would not deteriorate its profits and reputation as Wall Street’s largest firm.

Given the damages handed out in the case and the issue at hand, the action was unlikely to threaten Goldman Sachs. Indeed, the actions appear to have served no greater public purpose than just making the public wonder if Goldman had really committed fraud, nevertheless this still remained not clear to the public. Important parts of clarification that could be cited on this matter remained grounded in the procedural behavior and finances of enforcement actions in the SEC. Just like the case of Goldman, these types of cases are settled without trial and mostly with the perpetrator suspected of fraud neither admitting nor disproving the claims.

Owing to the fact that the presented case against Goldman were never recognized with any finality, and also Goldman refusing to admit to the allegations, this greatly publicized case of the United States charging Goldman Sachs with the case of fraud just faded away. I think the SEC penalties were very inadequate. It is unfortunate that the case failed to declare the misdemeanor of Goldman Sachs’ behavior. Therefore, no logical conclusion can be made

Based on your studies in this class, suggested steps that could have mitigated or prevented the misconduct

An effectual anti-fraud policy would mainly integrate four main mechanisms: detection, prevention, deterrence, and lastly response. Attitudes that succeed inside an organization put the base for a low or high fraud risk surroundings. Goldman Sachs should avoid promoting an atmosphere that affects lenience to fraud because maintaining high moral standards greatly brings long-term benefits to organizations and to stakeholders. Goldman should also avoid the conflict of interest because it could lead to divided personal allegiances. The organization should also create a code of ethics and an anti-fraud policy that will be very significant in preventing fraud. Both the code of ethics and the anti-fraud policy should be fixed in the culture of that organization. When joint with the unsuitable company culture and enticements, conflicts of interest could be damaging (Bess, 2012).

An efficient practice for dealing with conflict of interest that Goldman Sachs utilized could be defined in three varied, wide considerations. Goldman Sachs should institute a more effectual process that is motivated by a cross-functional management team that highlights and recognizes all conflict of interest within the commerce form.

It was also critical to risk assessment and prioritization as conflicts of interest posed the greatest risk to the firm such that resources could have been apportioned accordingly to the mitigate. The second consideration entailed having a good conformity and ethics program that was to be designed with an aim of addressing the conflicts of interest in the firm by identifying and prioritizing them. Other important measures included standards and actions, oversight, management regular with effectual ethics and conformity program, learning and training, reaction and avoidance, incentives and regulation, and reviewing and monitoring. In organizations, I firmly believe that strong morals and good business ethics has to be reinforced on employees. This starts from the top of the food chain, and trickles all the way down. Communication needs to be consistent so that employees all know their expectations. When top level managers have poor moral standards and/or poor business ethics, the employees will catch on and act the same way. This is a strong recipe for disaster within the company.

Conclusion

Despite the fact that Goldman Sachs settled all the fines and that the ABACUS deal was totally terminated, there still remains several numbers of serious questions that are yet to be answered. For example, the degree to which Goldman Sachs bears the blame to reveal certain information concerning Paulson’s commitment in Portfolio selection. Likewise, in the case Goldman Sachs had talked about Paulson in the flipbook, the question is, could the mere pointing out be enough or could Goldman Sachs have informed Paulson’s investors the short position?

For an organization that had already made very considerable steps in regard to its standing as a one of the most trusted consultant and a brilliant venture manager actions like that led to questioning the authenticity of the organization. Despite it appearing that Goldman did not mechanically commit the fraud it is obvious that Goldman Sachs located their welfare before their clients. Goldman Sachs ABACUS exemplifies a situation that increases many questions in regard to the value of the financial instruments to the society, and the duty of a company to their customer. Though the actions of Goldman couldn’t be mechanically judged as a straight breaking of the law, their behaviors were not of moral standing.

References

William D. (2012). "Goldman Sachs's long history of duping its clients". The Washington Post.

Bess, L. (2012). "Why I Left Goldman Sachs, Chapter Three: "My Alleged Competition". DealBreaker

Doyle, L. (2007). "Goldman Sachs marches on with Bush's candidate for World Bank". The Independent (UK)

Stanley, M. ( 2013). "The Goldman Sachs Guide To Manipulating Commodities". US News. Bodine, C. (2013). Core issues that were behind the fraud. Thousand Oaks, Calif.: SAGE.

Diane Pedrott Bryant & Brian R. Bryant(2003). (Boston). The corporation and/or government response. Boston: Allyn and Bacon.