Do we need to send Goldman execs to jail?
Is putting top Goldman execs behind bars the only way to really teach Wall Street a lesson?
That's the implicit question raised by Richard Sauer in a very interesting column in the New York Times about the cloudy nature of corporate penalties after the $550 million Goldman Sachs settlement with the Securities and Exchange Commission.
"When, exactly, does fining a public company deter potential future violators, bring attention to the significant of particular forms of misconduct, signal shareholders to throw (management) bums out, or readjust appropriately the interests of current and former shareholders? And when, on the other hand, does it merely provide a platform for agency self-congratulation?"
Sauer is right to say that the nature of an SEC settlement -- in which the defending party usually gets to neither admit nor deny wrongdoing -- is conceptual at best. Even if the $550 million were a lot of money for Goldman (which it's not), its shareholders are paying the money. Goldman must change its business practices some, but only in commonsense ways that will benefit the bank's well-heeled clients.
A more dramatic action would be to send relevant Goldman executives to jail. That'll stop bad conduct in its tracks. That, of course, is the purview of the Justice Department since the SEC doesn't have criminal authority. But the odds that Justice will bring a case are low since many questioned whether the SEC's civil case, which has a lower threshold of wrongdoing, would triumph in court.
Other measures, if the SEC had brought them, would be more meaningful. The SEC could force Goldman to fire executives involved in wrongdoing. But the agency only cites one relatively low-level employee by name in its complaint. Would firing Fabrice Tourre really matter? (He's already on paid leave.)
The SEC could seek hefty financial penalties against executives (which it often does but didn't in the Goldman case). And it could even try to claw back compensation paid to executives involved in wrongdoing (which it is increasingly doing, but not in the Goldman case).
That said, it's not as though SEC settlements, as ambiguous in their impact as they are, have no significance. They can provide firepower for private lawsuits, as may happen in the Goldman case.
And they can damage the reputation of a firm and depress its stock price. One study showed that while SEC penalties from 1978 to 2002 averaged $23.5 million per firm, the cost of an SEC enforcement action to a firm over the long run is 7.5 times that.
Such cases also often put pressure on top executives to leave. According to another study, 93 percent of executives involved in an SEC or Justice case for financial misrepresentation from 1978 to 2006 was forced to leave.
But without sending executives to jail -- or penalizing them financially -- the SEC's ability to deter and punish financial wrongdoing will always be limited.
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