SEC Inspector General Asked to Examine Goldman Suit (Update1)
April 23, 2010, 7:07 PM EDT(Adds Issa comment in the third paragraph.)
By Jesse Westbrook
April 23 (Bloomberg) -- U.S. Securities and Exchange Commission Chairman Mary Schapiro faces an investigation into whether politics drove the agency’s decision to sue Goldman Sachs Group Inc. for fraud.
Representative Darrell Issa, a California Republican, asked SEC Inspector General H. David Kotz to determine whether the agency’s April 16 lawsuit was timed to bolster the Obama administration’s push to overhaul financial rules. Schapiro said on April 21 that neither the White House nor Congress have any influence on SEC enforcement actions.
“The circumstances of the filing and subsequent events fueled suspicion that the commission, or one or more of its officials or employees, may have engaged in unauthorized disclosure of commission proceedings,” Issa said today in a letter to Kotz seeking a probe. Kotz, in a Fox television interview, said he would do an investigation at Issa’s request.
The investigation will bring additional scrutiny to a case the SEC is relying on to restore its standing with investors and lawmakers after the agency failed to detect frauds including Bernard Madoff’s Ponzi scheme. Goldman Sachs, the most profitable company in Wall Street history, said the SEC lawsuit is “completely unfounded” and pledged to fight it.
CDO Disclosure
The SEC accused Goldman Sachs of creating and selling collateralized debt obligations in 2007 based on subprime mortgages without disclosing that Paulson & Co., the hedge fund run by billionaire John Paulson, helped pick the underlying securities. Goldman Sachs also didn’t disclose to investors that Paulson was betting against the assets, the SEC said.
Schapiro, a political independent, joined the SEC’s two Democratic commissioners in voting to approve the suit on April 14. The two Republican members voted against the action.
Issa and eight other Republican lawmakers sent Schapiro a letter April 20 asking whether any SEC employee discussed the suit with the White House before the case was announced. He also requested all records and communications between the SEC and congressional Democrats.
In her April 21 statement, Schapiro said she’s “disappointed by the rhetoric.” The SEC is an “independent enforcement agency” and will “neither bring cases, nor refrain from bringing them because of political consequences.”
Looking Forward
SEC spokesman John Nester said the agency looks “forward to cooperating with the inspector general’s investigation.” Kotz didn’t immediately return a phone call seeking comment.
President Barack Obama, in an April 21 interview with CNBC, denied there was communication between the SEC and the White House about the case.
Treasury Secretary Timothy F. Geithner, in an April 22 interview on ABC’s “Good Morning America” program, said the SEC gave him and his staff “no warnings” about the case.
Obama is encouraging lawmakers to approve tougher rules for Wall Street in response to a credit crisis that triggered the worst economic slump since the Great Depression.
The Senate will likely begin debate next week on the measure, which would create a consumer regulator within the Federal Reserve to protect borrowers against deception in mortgage and credit-card lending. The bill would also create a mechanism for unwinding failed financial companies and increase transparency of derivatives markets.
Republican senators have argued that the measure would increase the likelihood that banks will take excessive risks in the future because it ensures government bailouts.
--Editors: Gregory Mott, Lawrence Roberts
To contact the reporter on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net.
To contact the editors responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net;
