Goldman Sachs and AIG Settle Fraud Suits

Given how closely the U.S. fraud-factories Goldman Sachs and AIG have been linked over the past two years, it is only fitting that their record-setting damage payments to settle two of their respective fraud suits should have been announced only one day apart.

For those who missed the news, on July 16^th it was announced that AIG would pay-out $725 million to settle a class-action law-suit which accused AIG of “stock-price manipulation, anti-competitive behavior, and accounting fraud.” A day earlier, Goldman Sachs settled one of the many law suits pending against it. This one was the SEC's suit against Goldman for fraud in one of its packages of “securitized mortgages”, and will cost Goldman Sachs $550 million, which includes $250 million being returned to “harmed investors”.

The AIG settlement was billed as “one of the biggest” class-action law-suits in U.S. litigation history, while Goldman Sachs' settlement was “the largest penalty ever assessed against a financial services firm.” As with most settlements in The Land of Fraud, Goldman Sachs didn't have to “admit any wrongdoing” with respect to its egregious conduct.

It is a clear non sequitur for the judge to rule that Goldman Sachs had not engaged in any willful misconduct – and then to assess it the most damages in the history of this sector. However, that didn't come close to being the most farcical aspect of the judgment. The judge also issued a “permanent injunction from violations of the anti-fraud provisions of The Securities Act of 1933”.

The SEC press release was so poorly worded that I read that statement a dozen times, and still could only guess at what it meant, so I went directly to the judgment itself. While all securities traders are (supposedly) prohibited from committing fraud, with this injunction the employees of Goldman Sachs (and only the employees of Goldman Sachs) are “doubly forbidden” from committing securities fraud.

This is nothing less than comical. While there was no finding of willful wrong-doing, the judge still found it necessary to wag his finger at these banksters and “doubly” forbid them from committing more fraud in the future. Let me try to interpret this (although seeking any sort of rationality here is a perilous endeavour).

If the members of this fraud-factory are caught committing fraudulent acts again, then the next time it won't be merely a ($550 million) “slap on the wrist”. The next time, the U.S. government will (supposedly) fully enforce its existing laws against Goldman Sachs. This would mean that future law-suits would not only force the banksters to pay for their fraud, but also have to admit to it. More importantly, the injunction clearly implies that future transgressions would be accompanied by criminal prosecution.

I ask all readers to file-away this “injunction” in their memories, and we will see if U.S. authorities can meet the low standard of finally enforcing their own laws, the next time that Goldman Sachs is caught engaging in fraud. We shouldn't have to wait long. It also sets up a delicious scenario in future litigation.

Given the inevitable lag in time between when transgressions are committed, and when complex litigation begins, in any fraud-suits against Goldman Sachs with the next two or three years, they will all relate to acts committed before this injunction was drafted, while the litigation is commenced after the injunction came into force. This means that prosecutors/plaintiffs will certainly invoke the injunction in any actions they commence against Goldman Sachs, and then what will Goldman's lawyers do?