Goldman Sachs: Too Big to Punish?

Wednesday, August 4, 2010

Page 6

IN MY OPINION (Column)

Goldman Sachs: Too Big to Punish?

By GERT K. HIRSCHBERG

(The writer is a retired trial lawyer, an American Board of Trial Advocates member since 1978 and a former professor of torts at five California law schools. He counts 4,000 of his former students among California’s lawyers and judges. He was presiding referee of the Disciplinary Board, later called the State Bar Court. He is a former member of the State Bar Board of Governors—1980 to 1983—and the Judicial Council of California.)

Stripped of its legal gibberish, the plea bargain entered into between Goldman Sachs and the SEC is roughly the equivalent of Charles Manson pleading to a 90-day jail sentence for all his sins.

If a member of the State Bar were to be found culpable of the same sins as Goldman Sachs, his or her sanction would be disbarment. What happened here? Too big to fail? Too big to punish? The SEC is the Securities and Exchange Commission, which was established by Congress in 1934 under the administration of Franklin Roosevelt. It is roughly the equivalent of a local district attorney, whose function is to prosecute misconduct in the financial community.

Goldman Sachs is a purveyor of stocks—here called derivatives, who for a commission sold them to the gullible community, but forgot to mention that its own arm, in a separate transaction, sold the same stocks short in a complicated financial transaction. In other words, while it touted and sold them to its clients to whom it owed a fiduciary duty, it at the same time bet that its value would to down the drain. This was conveniently concealed from its clients. In other words, while it did not represent adverse interests, it did take a position adverse to the interests of those to whom it owed a duty to be honest and forthright.

Proof in the pudding of the accuracy in these findings followed soon. On July 16, the day following the announcement of this agreement, the Dow Jones dropped and guess what: Goldman Sachs stocks rose 95 cents, or 0.7 percent, to 146.17.

All told, the agreement called for the payment by Goldman Sachs of the sum of $550 million but required court approval.

Settlements, of course, like motherhood, are favored in our jurisprudence. The term “plea bargain” in the criminal justice system was first used in the fifties to replace the theretofore secret negotiations. But an element of quid pro quo and fairness is required in addition to expediency. That is why in civil litigation involving minors, court approval is required. What is Goldman giving up? $550 million is roughly two weeks worth of trading profits. The fine for a drunk driving conviction of an individual proportionately exceeds this. Oh yes! In addition, this payment is inadmissible in any subsequent litigation. It is equivalent to a nolo contendere plea. No admission is intended. So they say. Or intended, so they decree.

For obvious reasons, our law does not just favor but needs settlements. If in the criminal justice system, plea bargains were not permitted, the system would come to a grinding halt. It would require the appointment of thousands of judges, public defenders, courtroom personnel. Every crime would turn into a calendar monstrosity. Courthouses would dot the landscape like trees. The same could be said about civil cases. Our system would come to a standstill. In fact, the system of justice would be shut down.

Our forefathers in the commercial world wisely protected against the onslaught of litigation. In an era when buyers, middlemen or consumers predominated the legal landscape, the law required in every breach of warranty action that before suit could be brought, the potential plaintiff had to give notice to the potential defendant. Why? Because it was well known that merchants and others preferred settlements to litigation. Hence, the notice, like the privity requirement were invented by the common law, not to stymie law students as they presently believe, but to fulfill the need at the marketplace.

With the avalanche of litigation in the last few decades, of course, have come a plethora of tools to facilitate nonjudicial dispositions of controversies. Neither Blackstone, Coke, Oliver Wendall Holmes nor any of their brethren (they didn’t have sisters in those days) have ever mentioned or thought of mandatory settlement conferences, ADRs, status conferences or discovery. It is a changing world.

Then what brought about this obviously inadequate settlement in the Goldman Sachs case? Hard to say. Expediency should not be allowed to replace the pursuit of justice. Sometimes the pendulum swings too far. Perhaps here it did.

Some years ago, the State Bar sought to disbar ex-President Richard Nixon. The State Bar Board of Governors demurred. It would not accept Mr. Nixon’s resignation. Then a compromise was reached. The State Bar did accept the resignation if he would acknowledge that discipline was pending against him. Thus was born a compromising resolve which has been used hundreds of times since then. An acknowledgement that discipline is pending with a resignation is today a face-saving resolution of an ugly problem. It is in effect the equivalent of a disbarment, and a bar to reinstatement.

It appears that an imaginative and hard-working SEC could have and should have exacted some imaginative innovations to have leveled the playing field between Goldman Sachs and its aggrieved clients. This settlement did not sufficiently tighten the noose.