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By Ronald Fink
Goldman Sachs is a long way from out of the woods even if the bank decides to settle soon with the Securities and Exchange Commission, according to an attorney who worked in enforcement for both the Justice Department and SEC.
A report in the New York Post on Thursday said Goldman was likely to settle early with the SEC after its public grilling on Capitol Hill on Tuesday. An early settlement could limit the bank's exposure to private lawsuits, including several that have been filed by shareholders and one class action case. That's because a settlement before the case goes to trial would prevent plaintiffs' lawyers from using any evidence provided during the discovery process.
A settlement could also limit problems for Goldman in any criminal case the Justice Department might pursue. The DoJ has started a criminal inquiry into the case, according to a report in the New York Times on Friday.
But a settlement with the SEC is likely to have tougher consequences for Goldman than it once would have, Pravin Rao, a partner specializing in financial services litigation at law firm Perkins Coie and a former assistant US attorney and SEC enforcement branch chief, told CFOZone Thursday.
Rao said the SEC was likely to impose much more difficult conditions for a settlement than it once would have as a result of the commission's difficulty last year in getting a judge to sign off on a deal with Bank of America.
Late in 2009, Judge Jed Rakoff of the Southern District of New York refused to approve a $33 million settlement the SEC proposed over charges the bank had misled investors during its acquisition of Merrill Lynch in the fall of 2008. Judge Rakoff approved the SEC's deal with B of A last February only after the commission increased the fine to $150 million. Even then, his approval was grudging.
"He wanted much tougher language," Rao said, adding that the SEC was unlikely to forget that.
"It's not a good thing for a government agency to have a judge reject a settlement," Rao said. "The SEC is not going to want to get burned again."
The Goldman case is being heard by Judge Barbara S. Jones, but in the same district as the SEC suit against B of A. Rao said it's quite possible that Judge Jones would be influenced by the result of the earlier case.
In fact, Rao expects the SEC not only to insist upon a stiff fine, but to demand that the bank agree to confess guilt to some degree. Rao cited recent public statements by SEC enforcement chief Robert Khuzami that the commission would no longer be so ready to offer settlements in which defendants neither admit nor deny any wrongdoing. Instead, Khuzami has said the enforcement division would require that they "admit to some facts," as Rao put it.
And those could be used as evidence against Goldman in private suits as well as by any criminal investigation undertaken by the DoJ.
In addition, Rao noted that such an admission, combined with an injunction that usually accompanies a settlement, might have significant consequences for Goldman's business practices, as the charges involve a key provision in the securities laws. "This could have an impact on how Goldman does business," he said. "The fine may be the least of their issues," he added, noting that "someone's going to be looking over their shoulder."
Even so, Rao said it might still make sense for Goldman to settle now, since Judge Jones is unlikely to agree to dismiss the case. "There's enough there to get past a motion to dismiss," he said. In that case, he noted, Goldman would be "gambling on winning."
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