SEC v. Goldman Sachs: Is Contrition a New Trend in SEC Enforcement?

Today's settlement between Goldman Sachs and the SEC contains a novel provision: contrition. In a court filing called the Consent, Goldman acknowledged "that the marketing materials for the ABACUS 2007-AC1 transaction contained incomplete information. In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was 'selected by' ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the selection process and that Paulson's economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure."

For the last 40 years, the SEC's settlement policy has allowed defendants to resolve enforcement cases without admitting or denying the SEC's allegations. Highly refined thought processes can be required to figure out what it means to neither admit nor deny. It is not an admission of liability. Or even an acceptance of responsibility.

Goldman's settlement--which also includes the usual boilerplate about neither admitting nor denying--takes a small step away from the agnosticism of the old policy. Contrition is not an admission of legal liability or even an acceptance of responsibility. But the settlement papers indicate that Goldman was--and very possibly future defendants will be--expected by the SEC to express regret or something comparable. The public at large might well see this as an improvement over a defendant neither admitting nor denying. After all, even three year olds are taught to say sorry when they make a boo boo. And contrition is likely to make settlements more palatable to presiding judges, who have to sign off on settlement proposals. Balky judges have recently made the settlement process more challenging, and it's in the interests of both the SEC and defendants to persuade judges not to nix deals that have been meticulously negotiated.

Lawyers will have a field day with the ambiguity of Goldman's expression of contrition. It may help customers and shareholders suing Goldman--but to what degree will be the subject of judicial rulings. Goldman might choose to avoid too much judicial clarity, because there remains the risk that a judge could consider the statement of contrition to be probative of Goldman's legal liability. Settling with customers and other private litigants before judges rule allows Goldman to put off to another day the legal significance of contrition. One way or another, look for more Goldman settlements (i.e., the cost to Goldman here is probably not limited to $550 million).

Many readers may wonder what the big deal is with Goldman's statement of regret. It's this: the SEC made the most powerful firm on Wall Street accept a disadvantageous change to 40 years of SEC enforcement policy. We don't know yet how disadvantageous to Goldman the change will be. But the fact that the recently ineffectual SEC Enforcement Division could extract even a smidgen of contrition from a defendant that had the means to litigate until the end of time shows that the SEC has gotten its mojo back.

The larger features of the settlement--a $535 million civil penalty, the largest in SEC history, $15 million in disgorgement, a court injunction, and undertakings by Goldman to improve the way it conducts business--are in the range of what one might have expected. This deal gives both sides bragging rights. Goldman paid less than the $1 billion or so in damages that the SEC alleged was caused to its customers who invested in ABACUS 2007-AC1. The SEC got a record setting penalty and Goldman's commitment to change the way it does business. But, most significantly, the SEC's victory (and that's what this was, even though Goldman's stock is rising in afterhours trading) means that power is shifting from Wall Street to Washington.