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Interesting Elements to the Goldman Story

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As I’ve told readers of my Wall Streetnewsletter, Wall Street and Washington are as connected as strongly as I’ve ever seen them in my 20 years covering financial news, due in large measure to the cries for financial reform in the wake of the recent crisis.

The strength of that connection multiplied several times over after the Securities and Exchange Commission announced fraud charges against Goldman Sachs. Goldman vigorously denies the charges, and I obtained a memo the company sent to clients outlining its defense.

This is one of the biggest stories we’ve covered in a long time because there are several important elements to it:

1. The company: Goldman’s reputation is pristine, which helped it continue to thrive even during the financial crisis. These charges come against the firm that many people would say is the least likely to find itself in this position. That’s why Wall Street has been rattled by the news. The natural question is whether more charges are coming against additional firms.

2. The timing and potential impact on financial reform: I can’t recall a similar situation in which charges against a publicly traded company were announced during the trading day. I’m struck by the irony that a major part of the SEC’s complaint accuses Goldman of withholding material information pertaining to an investment, and yet when it comes to material news about a publicly traded stock, that news is usually released when the market is closed, or trading in the stock is halted pending an announcement. Neither was done in this case.

In addition, the fact that the announcement came on the Friday before financial reform was scheduled to be taken up again in Congress at least raises the question of whether politics are involved. Did the Administration, seeing how divided the country was over health care reform, seek to galvanize support on Main Street against what it views are the problems on Wall Street?

My colleague John Harwood interviewed President Obamalast week, and he said his Administration in no way influenced the SEC’s decision or timing.

That may be true, but there are some pretty interesting coincidences. One is that, as the SEC was coming out with the charges, there were emails being sent from President Obama to his constituents saying that American needed to get moving on financial reform. Also, I searched “Goldman Sachs SEC” on Google this past week and two sponsored results popped up: one from Goldman titled “Goldman Sachs Website” and one from www.BarackObama.com titled “Help Change Wall Street.”

3. The role of the SEC: I think it is likely that these charges portend a much more aggressive SEC. The agency has come under a lot of criticism for missing things in recent years, including the Bernie Madoff scandal, and it’s reasonable to expect that we will see more actions from it in the future.

And that brings us to the question of whether the SEC will be successful when the case is presented in court. I have spoken to some of the best corporate attorneys on the planet in the past week, and virtually all of them say this appears to be a very tough case for the SEC to prove. It is a certainly a complicated cases involving sophisticated instruments and seasoned, high-stakes investors. It is also interesting that the vote within the SEC to bring the charges was 3–2, so there was no unanimity within the agency itself on how to proceed.

I expect a protracted legal battle to follow, and I think Goldman will dig in and fight these charges every step of the way. We’ll continue to follow it closely at CNBC and in Investor Brief. I think we all hope that, over time, we will be able to discern for sure whether the company acted illegally, unethically, both or neither.

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