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Experts: Goldman Case Won't Be Easy For SEC

The Securities and Exchange Commission's fight against Goldman Sachs is about more than just money. It's a test of whether the SEC's revamped enforcement team can keep up with the complexities of modern finance. Many people are watching to see whether the SEC can really get tough on Wall Street.

The Securities and Exchange Commission took on Goldman Sachs, charging it with civil fraud last week. The big bank denies wrongdoing and is fighting back.

This fight with Goldman is about more than just the money involved in that case – investors allegedly lost more than $1 billion. It's a test of whether the SEC can keep up with the complexities of modern finance. And many people are watching to see whether the SEC can really get tough on Wall Street.

Trying to understand the financial crisis left us with a new lexicon of terms hardly anyone can explain, including credit default swaps and synthetic collateralized debt obligations.

More generally, some people call them "exotic instruments" because they are complicated.

For the SEC, prosecuting potential fraud involving investments like these is – to put it simply – hard.

"They will only be able to pick off a handful of these, because of the time it takes and the money it takes," says Lynn Turner, former chief accountant for the SEC, whose work included forensic tracking of money. "Typically the SEC has been an agency of many attorneys who are not always well versed in the business transactions and operations of Wall Street."

Extensive Research Behind Investigations

Turner says it requires lots of financial knowledge even to know where to look for possible fraud. And once investigators identify something fishy, the process involves extensive depositions, downloading data from hard drives and going through millions of e-mails.

"It just takes incredible time, and incredible number of staff; it takes very highly qualified forensic and computer experts," Turner says. "That's very expensive, very time consuming.

And the SEC's opponents – in this case, Goldman Sachs – have tons of resources to match them.

The SEC suffered some big missteps with high-profile cases involving Bear Sterns and Bernard Madoff. And it's mindful of its challenges.

New Enforcement Teams

So now the SEC is boosting its policing of this new area because it's the agency's job to make sure investors have faith in the markets.

Earlier this year, the SEC created new teams within its enforcement bureau with expertise in some of these complex financial products. Robert Khuzami, the director of that bureau, declined an interview with NPR.

But last month he spoke to the Society of American Business Editors and Writers and said that Wall Street firms sometimes use the complexity of products to conceal misconduct.

"So the only way to catch them is to be smart in the areas that they operate," Khuzami said.

But then there's the added challenge of winning the case if it goes to court. And there, experts say, the SEC faces more obstacles. First, it needs to explain how these investments work to a jury. And then prosecutors need to prove, definitively, that the defendant broke the law.

In the Goldman Sachs case, the SEC says the bank allowed one of its clients to structure the investment, even as that client was betting against it.

Goldman's actions may seem unethical, but that's not the legal issue here. It's whether Goldman should have disclosed a possible conflict of interest.

No Standard For Disclosure

Peter Henning, a professor and former attorney in the SEC enforcement division, says with these new products, there's no single standard for what is proper disclosure.

"Disclosure is not the same in every case," Henning says. "The buyers of this security were not mom and pop investors. These were not people off the street. These were large financial institutions with their own ability to research the underlying security and the risks involved."

Indeed, in a conference call Tuesday, Goldman Sachs said the investors understood the risks involved. Goldman's general counsel also said those investors knew that other investors would be betting against them – that's just the way the game works.

Henning says these newfangled financial products didn't even exist when he was at the SEC, and he admits he just barely understands them. So he doesn't envy the SEC's task of going after Goldman Sachs. He's also grateful he doesn't live in Manhattan, where the jury would be picked if the case goes to trial.

"I would not want to sit in the courtroom and listen to this testimony because it's going to put a lot of people to sleep," Henning says.

Goldman Sachs said Tuesday that the case appears to be heading to court. It has not, however, ruled out the possibility of a settlement. Copyright 2010 National Public Radio. To see more, visit