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White Collar Criminals and the Financial Meltdown by Susan Will

White Collar Criminals and the Financial Meltdown by Susan Will

Author:Susan Will
Language: eng
Format: epub
Tags: LAW036000, Law/Ethics & Professional Responsibility, BUS008000, Business & Economics/Business Ethics
Publisher: Columbia University Press
Published: 2012-10-29T16:00:00+00:00


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THE FAÇADE OF ENFORCEMENT

Goldman Sachs, Negotiated Prosecution, and the Politics of Blame

JUSTIN O’BRIEN

The degree of state intervention required to stabilize still-febrile capital markets in the United States has partially changed the enforcement dynamic in the prosecution of white collar crime. Exhortations by industry, backed by funded academic research, to policymakers that high levels of public and private enforcement needed to be curtailed (see, e.g., Committee on Capital Markets Regulation 2006, 32; 2007) on the grounds that a highly litigious culture threatened investor confidence, privileged overzealous enforcement, and contributed to a loss in prestige, have been demonstrated to be at best naive. In the United States, at least for now, the need for security has trumped innovation (Stiglitz 2008). The result is that the governance and accountability deficit associated with “creative enforcement” is once more back on the agenda.

Creative enforcement refers to innovative legal strategies used by prosecutors to secure corporate behavioral change (O’Brien 2007, 2009). Circumventing the necessity of going to trial, these measures often take the form of negotiated consent orders or, more problematically, deferred or nonprosecution agreements, which can include appointment of external monitors (Government Accountability Office 2009a, 2009b). Using these methods to hold executives accountable under the current legal and regulatory framework remains challenging, as the civil litigation taken and subsequently settled by the SEC against Goldman Sachs makes clear (Securities and Exchange Commission v. Goldman Sachs & Co. and Fabrice Tourre 2010).

The SEC complaint accused Goldman Sachs of perpetrating a fraud on the market by failing to disclose that an investor with an interest in the collapse of ABACUS, a synthetic CDO securitization offering, played a central role in choosing the referent securities. The former investment bank paid a record $550 million fine to settle the litigation. In addition, it committed to remedial corporate governance reform, including the redefinition of “the role and responsibilities of internal legal counsel, compliance personnel, and outside counsel in the review of written marketing materials for such offerings.” The settlement also requires “additional education and training of Goldman employees in this area of the firm’s business” (SEC 2010a). The SEC’s director of enforcement, Robert Khuzami, claimed that the settlement sent “a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing” (SEC 2010a).

There can be no mistaking the rhetorical flair of the SEC nor its capacity to reinvent itself as a model regulator. But it remains an open question whether the management of the Goldman Sachs case—or indeed the agency’s general approach to enforcement—presents evidence of the possibility of substantive change in either the internal governance or external policing of Wall Street. The SEC, for example, declined to appoint an external monitor. The relative leniency shown to Goldman Sachs stands in sharp contrast to the more aggressive approach taken by the U.S. Department of Justice in recent negotiated prosecutions in the corporate sector, for



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