The Goldman Sachs Prosecution Chess Game (Memories Of Apple Back Dating)

The US Attorney of the Southern District of Manhattan, home to most prosecutions of Wall St. firms, has begun an investigation into Goldman Sachs Group’s (NYSE: GS) trading to see if any of its employees committed securities fraud. Much of this is likely to center around activities that are part of the SEC charges against Goldman which are civil actions.

It is very likely that The Justice Department had access to SEC filings, so it is a wonder that it took so long for the criminal investigation to begin.

It is almost certain that the two investigations against Goldman and Senate hearings in which the bank’s management was grilled are not coordinated in any way, but the government is playing a game of three-tiered chess against the company.

Goldman may be up against long odds with three parts of the US government pushing to find out if the company committed any wrongs in its dealings with customers by selling them mortgage-backed securities without proper disclosures.  Goldman’s counterargument is that it is alright to bet against clients because they are clever enough to see the bet and its mechanisms. That is fair enough since likely goes on all over Wall St.

Experts say that litigation with the federal government is like playing against the house in a casino. That is only true when it is true. In 2007, Apple was charged with backdating options during 2001. The consumer electronics firm threw its CFO under the bus along with some lower-level officers. Steve Jobs and the board were exonerated and the matter disappeared. It turned out that many of the options backdating charges against other companies were dropped. That shows that the government is not omnipotent and losses its share of cases. Or, it settles with companies for very modest sums. That happened recently in a deal stuck with Bank of America (NYSE: BAC) over pay packages given to Merrill Lynch employees. The issue was whether management at the bank or Merrill hid the compensation. The SEC proposed settlement was keelhauled by federal judge Jed Rakoff.

Goldman has been left for dead or at least severely wounded. But, the track records of both the SEC and Justice Department on securities cases is mixed. Goldman has hired an army of attorneys and PR men. Like Apple, it has unlimited resources. And, the government is usually dumber than it seems.

Douglas A. McIntyre