Goldman Sachs Girds for Battle With the SEC Over Fraud Case

Goldman Sachs is preparing to file a full-blown, point-by-point defense against the fraud allegations filed by the Securities and Exchange Commission, according to people familiar with the matter.

The Goldman Sachs booth on the floor of the New York Stock Exchange
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The Goldman Sachs booth on the floor of the New York Stock Exchange has learned that, contrary to persistent market rumors, a settlement with the SEC is not imminent. Instead, the company is preparing to file a detailed response to the fraud charges.

Officially, Goldman will not talk about the case. "As always, we will not comment about an ongoing regulatory matter," a spokesman for Goldman Sachs said.

In April, the SEC filed a civil fraud suit against Goldman, claiming that the Wall Street investment bank had worked with hedge fund manager John Paulson to design a security destined to blow up on investors, who lost $1 billion in the deal. The case ignited a firestorm of criticism against Goldman, including a widely followed Congressional hearing, and sent its stock plunging.

Although Goldman’s lawyers have had at least one meeting with the SEC, the two sides did not discuss details of a possible settlement and no agreement was reached.

A sticking point for Goldman is the SEC’s fraud allegations. The company is unwilling to agree to any settlement that would have the appearance of affirming that Goldman committed fraud, a person familiar with the matter says. However, Goldman might be willing to settle a case alleging that Goldman was only negligent in omitting a material fact in marketing the deal, the person said.

Goldman Sachs CEO Lloyd Blankfein
Goldman Sachs CEO Lloyd Blankfein

The SEC wants to show that Goldman has been punished. It may be unwilling to cut a deal in which Goldman neither admits or denies wrongdoing, an attorney familiar with the thinking at the SEC said.

So what’s Goldman’s next move? Goldman is simultaneously pursuing settlement talks with the SEC and preparing to file a defense with the court, according to people familiar with the situation.

If a settlement is not reached, Goldman will have to file a response with the court by mid-June or ask for an extension. It is common for defendants to begin by asking the court to dismiss the case as completely without merit.

Goldman’s management, however, does not believe that the company stands a chance of winning a dismissal, a person familiar with the matter said. So the company’s lawyers will likely skip this step and move directly to filing a response denying the charges in detail, the person said.

Goldman’s lawyers and executives think they might be able to gain a strategic edge in the discovery process, according to the person. The SEC already has hundreds of thousands of pages of documents handed over by Goldman, leaving little chance that more alleged wrong-doing on Goldman’s part would be discovered leading up to trial.

But Goldman has not yet had access to the SEC’s files or witnesses, and Goldman hopes it can find holes—witnesses with inexact memories, conflicting statements, documents that show those who lost in the deal understood the risks—in the case during discovery.

The rumor of an impending settlement may have started last week because of a technical legal issue. The SEC filed its case against Goldman on April 16th. Under the federal rules of civil procedure, defendants have 30 days to file a response to a lawsuit. The absence of any filing by Goldman after those 30 days elapsed may have lead some to conclude that a settlement was imminent.

But that thinking would have been mistaken. CNBC has learned that a secret agreement between Goldman and the SEC extended the deadline for Goldman to respond. The week following the filing on the complaint, Goldman agreed to waive “service of process” in the case, according to a person familiar with the agreement.

This had the effect of extending the response deadline out to sixty days after the waiver. In short, rather than being at the end of Goldman’s time limit to respond, we are just about halfway through it.

It is possible—in fact, it is likely—that eventually this case will be resolved in a settlement. The situation could change at any moment, if either Goldman or the SEC decides to back down. But you probably shouldn’t hold your breathe for a settlement to materialize quickly.

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