Goldman Sachs, one of Wall Street's biggest firms, will pay a record $550 million and change its business practices after being accused by federal regulators of misleading investors who bought subprime mortgage investments. According to the
Securities and Exchange Commission, the hefty fine is the largest-ever imposed the SEC. Out of the $550 million to be paid by Goldman, $250 million will be returned to investors and $300 million will be paid to the U.S. Treasury.
The agency cracked down on Goldman because the firm sold mortgage-backed securities -- called CDOs or collaterized debt obligations -- to large groups of investors, while simultaneously failing to disclose to investors that one hedge fund, Paulson & Co., had made huge financial bets that the mortgages would lose value.
That Paulson took what's known as a "short position" against those mortgage investments wouldn't ordinarily have gotten Goldman into trouble. The problem, however, was that Goldman also let Paulson play a key role in picking which mortgage investments would be part of the CDOs -- and Goldman didn't reveal this fact to investors.
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Top 20 Financial Villains
Joseph Jett was at the center of one of the biggest bond scandals in history. Once a star trader, Jett recorded massive profits while at Kidder Peabody by exploiting a flaw in the firms accounting system. In actuality he had lost the firm $300 million. When Jett's manipulations came to light in 1994, the resulting bad press led the parent company of the firm, GE, to sell Kidder Peabody to Paine Webber.
After being sold, the name Kidder Peabody was dropped, and the brand was history. Jett may not have harmed many investors directly, but he did single-handedly bring down a company with a 130-year history. After being fined, barred for life from trading and forced to pay restitution in 2004, Jett maintained that he did nothing wrong.
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Top 20 Financial Villains
Bernie Madoff needs no introduction. A man who lost $50 billion in investment funds through blatantly fraudulent activity, his lies and manipulation have harmed thousands of lives irreparably. His schemes may cause federal probing into the workings of hedge funds, unearthing more corporate culprits who used Madoff to create profits through illicit means.
Top 20 Financial Villains
"In the 16 years since his release from prison, disgraced junk-bond king Michael Milken has beaten prostate cancer, raised hundreds of millions of dollars for medical research and reshaped an image tarnished by a 1990 conviction for securities fraud," according to the Los Angeles Times. At the same time, this former king pin of Wall Street embodied the epitome of corporate greed that flourished during the '80s, which seemed to place making money above any moral expedient. Milken served in prison from March 1991 to January 1993 and paid $650 million in fines for the felonies of stock parking and stock manipulation.
Despite these acts of redemption, his site illustrates the fact that Milken is more interested in clearing his name than fully admitting the horrid nature of his crime -- using the market unfairly to his advantage at the expense of the entire investing community.
Top 20 Financial Villains
Former CEO and chairman of Enron Kenneth Lay was convicted on 10 counts of securities fraud and conspiracy for the now infamous scandal that not only brought down his firm, but also cost investors billions of dollars. The Enron episode was a nail in the coffin of the public's trust in corporations to act in the best interests of the communities they serve. Lay died on July 5, 2006 before his sentencing scheduled for October could take place.
Top 20 Financial Villains
Former CEO of Tyco International L. Dennis Kozlowski was convicted in 2005 of spending more than $400 million of his company's money to support a high-flying luxury lifestyle. Kozlowski spent $1 million alone on a birthday party for his wife at the time, pretending the party was a shareholder meeting to justify the cost to Tyco.
Kozlowski maintains his innocence, claiming that none of the spending was hidden and that all his compensation, however extravagant, was approved by the company. He is currently serving eight years and four months to 24 years in prison for misappropriation of Tyco funds. Maybe in that time he will develop an inner sense of conscience.
Top 20 Financial Villains
Alan Bond (not pictured in this illustration) was sentenced in September of 2002 for cheating clients of his financial services out of millions of dollars. An Ivy League graduate of Dartmouth and Harvard Business School, this popular Wall Street figure had been featured as a Black Enterprise expert at the magazine's events and on prominent television shows.
Through his criminal mismanagement of client funds, many hard-working employees of large institutions were cheated out pension monies. When a member of the financial upper class steals the honestly-earned income of the middle class, you know you have a morally corrupt crook on hand.
Top 20 Financial Villains
Jeff Skilling was the CEO of the Enron Corporation in 2001. (At that time, Lay stilled served as chairman.) On May 25, 2006, he was convicted of 28 felony counts including conspiracy, insider trading, making false statements to auditors, securities fraud and insider trading.
Skilling was sentenced to 24 years and 4 months for his crimes and fined $45 million. He is currently serving his term, but is facing a resentencing. Will he be given a chance at a shorter sentence after flagrantly cooking his company's books and losing investors billions? Unfortunately, it looks like up to nine years will be shaved off his sentence.
Top 20 Financial Villains
Charles Keating, Jr. is remembered not-so-fondly as the poster "boy" of the savings and loan scandal that rocked the financial world in the late '80s. Now 85, Keating served four and one half years for multiple state and federal charges of fraud, racketeering and conspiracy related to the fraudulent mismanagement of the American Continental Corporation and the Lincoln Savings and Loan Association.
Of particular note is the fact that Keating encouraged 23,000 bank clients, many retired people, to pour their savings into securities his company created, knowing they were extremely risking -- without explaining the risk. His convictions were overturned in 1996, but the government bail out necessitated by Keating's crimes cost American citizens $3.4 billion in taxpayer dollars.
Top 20 Financial Villains
Kevin Ingram was a high-flying financier with a Stanford MBA when he was arrested in 2001 for laundering money for terrorists, including Osama Bin Laden. "A protégé of former U.S. Treasury secretary Robert Rubin and one of the financial world's rising stars," Ingram was convicted in July of the same year, just 52 days before the infamous 9-11 attacks.
Top 20 Financial Villains
Joseph Jett was at the center of one of the biggest bond scandals in history. Once a star trader, Jett recorded massive profits while at Kidder Peabody by exploiting a flaw in the firms accounting system. In actuality he had lost the firm $300 million. When Jett's manipulations came to light in 1994, the resulting bad press led the parent company of the firm, GE, to sell Kidder Peabody to Paine Webber.
After being sold, the name Kidder Peabody was dropped, and the brand was history. Jett may not have harmed many investors directly, but he did single-handedly bring down a company with a 130-year history. After being fined, barred for life from trading and forced to pay restitution in 2004, Jett maintained that he did nothing wrong.
Top 20 Financial Villains
Ivan Boesky is famous for saying: "I think greed is healthy. You can be greedy and still feel good about yourself." This attitude made him a major player in the shocking insider trading scandals of the '80s, in which he and his cohorts used secret information to buy stocks in total disregard for trading laws. After his conviction for making $200 million through illegal trades, Boesky was fined $100 million, served two years in prison and has been barred from working in the securities industry for life.
Hopefully, by getting caught and being fully prosecuted, Boesky's case has deterred at least a few Wall Street insiders from using their special knowledge to take advantage of a market intended to serve all.
Top 20 Financial Villains
So in effect, at the same time that Paulson was selecting various investments and betting that they would go sour, Goldman was letting its clients buy those same investments and touting them, even as the housing market began to implode. The soured mortgage investments ultimately wound up costing Goldman clients about $1 billion. In settling with the SEC, Goldman acknowledged that the manner in which it marketed the investments was improper. Specifically, Goldman acknowledged that it was "a mistake" for the firm to fail to disclose Paulson's role in the portfolio selection process.
In addition to the fine, Goldman agreed to take remedial action in reviewing and marketing certain mortgage securities. The firm said it is also currently conducting a comprehensive, firm-wide review of its business standards. "This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing," said Robert Khuzami, Director of the SEC's Division of Enforcement.
Half a billion dollars is a lot of money -- and ordinarily wouldn't be deemed as a mere slap on the wrist. But in this case, I question how much pain Goldman will feel paying a $500 million fine. Goldman Sachs earned $12.2 billion in net income in 2009 -- which means the SEC fine amounts to less than 5 percent of the company's profits last year. For the first quarter of 2010, Goldman posted earnings of $3.5 billion, on revenues of $12.8 billion. This is a bank that's paid out billions of dollars in bonuses alone in recent years, not to mention having received $10 billion in the Wall Street bailout plan back in 2008. The company did repay that $10 billion in 2009.
But what do you think: Did the SEC send the right message to Wall Street by slapping Goldman with this huge fine? Or did Goldman Sachs, which acknowledged its "mistake," get off easy financially?
Lynnette Khalfani-Cox, an award-winning financial news journalist and former Wall Street Journal reporter for CNBC, has been featured in the Washington Post, USA Today, and the New York Times, as well as magazines ranging from Essence and Redbook to Black Enterprise and Smart Money. Check out her New York Times best seller
'Zero Debt: The Ultimate Guide to Financial Freedom.'
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By: jazi on 9/04/2010 4:14PM
How about both! Some firms, who don't have as much revenue as Goldman Sachs, will likely take note of the potential cost for dirty dealing. And no firm, not even Goldman Sachs, can continuously have a repeat performance of a $500 million fine. So, hopefully, investment companies will pay attention.
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