Goldman case marks new era of tougher SEC enforcement, but old-school bully pulpit still key

Goldman case shows power of SEC’s bully pulpit

WASHINGTON — The Securities and Exchange Commission’s fraud case against Goldman Sachs signals a new era of toughness for an agency beset by a series of public blunders.

Yet as it aims to become a tougher cop, the SEC faces a new obstacle: Banks have grown faster than the penalties the agency typically imposes. The sheer size of Goldman — whose quarterly profit just hit $3.3 billion — means court-approved penalties are likely to be too small to hurt it financially.

But current and former SEC officials say penalties aren’t the agency’s most potent tool. The SEC’s statements and actions often carry higher costs: Boards remove managements. Shareholders file their own lawsuits. Investors sell off company stock. And potential clients defect to competitors.

“The weapons in the commission’s arsenal are many, but the bully pulpit is unmatched,” said former SEC spokesman Michael Robinson. “Once the SEC makes an announcement, the dominoes start to fall.”

Already, the potential costs to Goldman are piling up. Britain’s Financial Services Authority said Tuesday it will investigate Goldman Sachs International, an overseas subsidiary. And German regulator BaFin will ask the SEC for information as it considers bringing its own charges, Germany’s Welt am Sonntag newspaper reported, quoting a spokesman for Chancellor Angela Merkel.

Still, there appears to be little concern about Goldman’s long-term health. Credit Suisse analysts still say they think Goldman will continue to outperform the financial sector, they wrote in a research note Monday.

They wrote that any financial penalties for the firm would likely be “very manageable relative to Goldman’s income generation.”

Still, SEC enforcement chief Robert Khuzami said the fear of fallout from SEC charges will deter securities firms from breaking financial laws. And he argued that financial penalties also play an important role in cases like the one against Goldman.

“Financial penalties are critical because they add some sting to a sanction,” Khuzami said in an interview with The Associated Press. The ripple effects of the penalties also can hurt by, for example, leading shareholders to question management’s conduct.

When it comes to financial penalties, “bigger isn’t necessarily better,” Khuzami said. The government doesn’t want to impose fines so large that they would hurt shareholders, he said.

Since joining the agency a year ago, Khuzami has led the SEC’s drive to toughen its stance on Wall Street. He pointed to a range of new initiatives. They include grouping lawyers by subject area so they can develop expertise, new policies for working with whistleblowers, clearing the way for faster subpoenas and assessing division performance through standardized metrics.

Former enforcement division employees point to a new policy that allows agency lawyers to issue subpoenas without collecting signatures from SEC commissioners. Before the change, the process had slowed investigations, the officials said.

When a person was posting false press releases online last year to manipulate stock markets, the division was able to collect documents that established the location and identities of the culprits before they could do more damage, Khuzami said.

The enforcement push follows a series of embarrassing failures of oversight for the agency before Khuzami and SEC Chairman Mary Schapiro. They included Bernard Madoff’s Ponzi scheme and the one allegedly run by jailed Texas financier R. Allen Stanford.

The agency’s tougher tone hasn’t pleased everyone.

Goldman has accused the agency of singling it out. In a series of statements, the bank said it wasn’t given the chance to reach a settlement — the common outcome of civil charges. Industry officials have grumbled that Goldman is being treated unfairly as the SEC tries to ride the wave of public resentment toward the bank.

Republicans all but accused the agency of timing the announcement to speed the Obama administration’s pending overhaul of financial regulation through Congress. They say the charges are all saber-rattling and publicity.

That argument was bolstered by the revelation that SEC commissioners approved the charges against Goldman on a 3-2 vote, along party lines, with both Republicans opposing them.

But former officials from both parties agreed that the SEC would not have brought charges if agency employees weren’t confident they could win in court.

And Robinson said such publicity serves the SEC’s goal of warning companies that they’ll pay high costs for improper behavior.

“They’re doing it to make a point — and so what?” he said.