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Saturday, April 17, 2010
Goldman Case: Regulation Through Litigation?
The congruence of the Obama Administration's eagerness for financial system regulatory reform and the announcement Friday of the Securities and Exchange Commission's civil lawsuit against Goldman Sachs Group Inc. and a mid-level vice president, Fabrice Tourre, makes one wonder whether this enforcement action is an effort to use litigation to achieve what cannot at this moment be accomplished through regulation.
Surely there are many cases -- civil as well as criminal -- brought by the authorities despite a clear basis in law, leading to frustration and a drive to go to the edges of the law (or beyond) to build a legally justifiable case against someone for conduct which is disfavored and sought to be deterred (unethical conduct falls in this category), but which is not illegal. In short, these cases illustrate the use of civil litigation (and in the criminal context, investigation with the threat of prosecution and incarceration) to meet the objectives of regulations which do not exist.
It remains to be seen where the Goldman case falls. The facts of this case are undeniably very complex, and far more complex than what was spelled out in the civil complaint. Remember this admonition when you hear so-called experts opining on this case.
There are claims that Goldman breached some sort of fiduciary duty to some supposedly very sophisticated investors. However, a breach of a fiduciary duty, without more and in isolation, is not a crime. At least, not yet. That doesn't mean there won't be efforts to use some other theory to disguise the effort to criminalize fiduciary breaches. But beware of "theory shopping." Last week I reported that the Third Circuit Court of Appeals rejected a Justice Department effort to essentially transform a claimed breach of fiduciary duty (which is generally a state law claim under state corporate law) by two Bristol Myers Squibb executives into a federal criminal act -- a felony.
One other point: Nothing in this article should be read to infer that I defend, condone or encourage any of the challenged behavior. (This is the business/economics world equivalent of what the Star-Ledger's Paul Mulshine aptly calls the "moron perspective.") Here, the fact that I refuse to automatically jump on the Let's-Hang-Goldman-Sachs bandwagon does not mean that I agree with, defend or condone anything that any of these banks or their affiliates have done. For now, perhaps it is best to view this case through the prism of the simple phrase "failure to disclose."
Eric Dixon is a New York attorney who has significant experience in securities regulation and related litigation. He understands that these cases and controversies are typically very complex both factually and legally. For inquiries, please call 917-696-2442.