Wary investors are putting the revamped U.S. Securities and Exchange Commission under a microscope as the Wall Street watchdog launches forward with its case against Goldman Sachs (GS).
Since the beginning of 2009, the SEC has undergone a complete changeover, from on-ground investigators to top directors. It's a different agency from the one that failed to initiate any action in the Bernie Madoff and R. Allen Stanford investment scandals until it was too late for investors.
But will they be able to stand up to financial giant Goldman Sachs?
Duke University law professor James Cox, says so far they've been making all the right moves and the agency has some firepower behind its moxie. The SEC's case calls out Goldman's marketing of a toxic and complex financial product backed by souring mortgage loans.
Revitalized SEC Keeps It Simple
In an emailed statement to DailyFinance on Wednesday, SEC Spokesman John Nester confirmed that much of the investigation has been completed. "Our case is built on a thorough evidentiary record that includes testimony, documents, handwritten notes and emails that will be presented in court at the appropriate time," Nestor said.
Cox, a securities law expert, confirms the SEC has spent time investigating this case and has most of the evidence it needs. "It's a straight-forward case, going after one issue and it seems like the SEC is holding all the cards," he says.
Goldman's responses so far, Cox said, amounts to smoke and mirrors and he's betting that there will be a settlement sooner rather than later.
Goldman Says It Made No Money on Deal
Goldman, which just reported $3.3 billion in quarterly profit, said the SEC's accusations are unfounded and it never made money on the deal in question.
Former SEC investigator Jeff Plotkin said the SEC's Chair Mary Shapiro hired new lawyers who carry real experience in terms of successfully trying financial fraud cases. Plotkin points to the hiring of enforcement chief Robert Khuzami, who has a strong investigative background as a federal prosecutor from the US Attorney's Office for the Southern District of New York. That region includes Wall Street.
His experience hits all the high points when it comes to fighting corporate fraud -- racketeering, Ponzi and securities fraud.
SEC Enforcement Chief a Bulldog
Khuzami is already credited with restructuring the SEC and recruiting investigative talent. He's done away with the red tape and set policies in place to quickly follow up on tips by whistleblowers. Khuzami's investigators also have the power to issue subpoenas without first getting the signatures of the SEC commissioners.
In the April 16 statement announcing the case against Goldman, Khuzami was direct, and unlike past SEC releases, he spent more time talking about the case and evidence rather than the good work by the agency.
"The product was new and complex but the deception and conflicts are old and simple," said Khuzami, who holds the title of SEC director of the division of enforcement. "Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party."
SEC Still Has to Overcome History
For the case to have a favorable outcome, experts say the independent federal agency needs to get a quick settlement and sanctions against those involved in the alleged fraud. The longer the case drags on, the more wary investors become. The worst case scenario would be a trial and subsequent appeals.
Plotkin, an attorney with Day Pitney, said although everything seems to be in place for this case, there are still questions about whether the SEC is up to the task. He was an SEC investigator in the late 1980s and worked on a host of cases that grew out of the last recession, such as Salomon Brothers and the notorious boiler room penny-stock scandals.
"You have to remember that the SEC is like a huge cruise ship," Plotkin says. "It takes a while for it to turnaround. Now at least they are trying to get it headed in the right direction."
Does a Revitalized SEC Have the Right Stuff to Tackle Goldman Sachs?