In Goldman Sachs we Trust!

MSNBC news service recently reported, “Goldman Sachs executives asserted the bank would ‘never intentionally mislead anyone’ as it defended itself… against government civil fraud charges,” (MSNBC.com, April 2010).

How can the court of public opinion believe such a statement from Goldman Sachs executives after a second financial crisis in a decade has devastated working class American’s retirement portfolios, due in no small part to corporate corruption, fraud, and poor management (Enron, Tyco, Worldcom, AIG, GM, Lehman Brothers, etc., etc.)?

The Securities Investor Protection Corporation (SIPC) was set up by Wall Street to protect investors when broker dealers failed.  Essentially, SIPC is a nonprofit membership corporation funded by its members, including Goldman Sachs.  Until recently, the annual SIPC premium paid by Bear Stearns, Lehman, Goldman Sachs, JP Morgan, and others for more than the past decade was only $150.  It took only one failure to use up the money.  The Madoff scam devastated the SIPC fund.  To the public, this appears to be yet another fraud perpetrated by Wall Street on investors. 

The Financial Industry Regulatory Authority, Inc., or FINRA is a private corporation which functions as a self-regulatory organization (an organization that exercises regulatory authority over an industry or profession).  FINRA performs market regulation under contract with brokerage firms and trading markets.  It focuses on regulatory oversight of all securities firms that do business with the public.  FINRA regulates by adopting and enforcing rules and regulations governing its members’ business activities.

FINRA has displayed a potential massive conflict of interest in its dealing with its internal investment portfolio. A clear example is FINRA’s behavior with its Auction Rate Securities (ARSs).  Going into 2007, FINRA had $647 million dollars of ARSs.  FINRA sold its ARS holdings before the markets collapsed.  Meanwhile, investors got stuck with approximately $150 billion of ARSs.

“One would have to be exceptionally naïve to think FINRA officials did not have material, nonpublic information on the ARS market before it decided to sell its holdings. Having information about the securities and acting on it without that information being available to the public would potentially qualify as front-running and insider trading,” (Larry Doyle at Sense on Cents).

FINRA’s head at the time, Mary Schapiro, was called a ‘dear friend’ by Mr. Madoff.  Now Ms. Schapiro is the head of the U.S. Securities and Exchange Commission (SEC).  Congress and Mary Schapiro should be telling FINRA to provide transparency, but they’re not.  This is the power of Wall Street lobbying, it’s business as usual.  Wall Street has turned into a massive oligopoly.

When FINRA was formed, SEC Chairman Chris Cox said, “The consolidation of NASD’s and NYSE’s member firm regulatory functions is an important step toward making our self-regulatory system not only more efficient, but more effective in protecting investors.”

It’s all about confidence.  Americans may not know about FINRA, but they do know the financial system is plagued with corruption, and Goldman Sachs appears to be part of the problem.

Similarly, The Public Company Accounting Oversight Board (PCAOB) is a private-sector, non-profit corporation created by the Sarbanes-Oxley Act, a 2002 United States federal law, to oversee the auditors of public companies.  Its stated purpose is to “protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports.”

Yet auditors don’t find fraud.  How can you “protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports” if you don’t find and report fraud?

Caveat emptor (buyers beware), when a company fails, such as Lehman Brothers, the investors are at fault for not doing their due diligence; i.e., for not investigating further beyond the usual sources of material, public information. 

How can the American public truly believe Goldman Sachs executives “never intentionally mislead anyone?”

If Goldman Sachs were serious about earning the public’s trust, a group of finance and accounting professionals, with first-hand knowledge of corporate fraud, have created an online forum (http://www.zethics.com) that provides employees a structured process to anonymously disclose information about corruption, fraud and poor management to investors and the public.

Recent studies indicate that employees find more corporate fraud than regulators.  Providing Goldman Sachs’ employees an opportunity to anonymously disclose information about the business practices of the company and its executives is an internal audit best practice, and will go a long way to prove executives at Goldman Sachs can be trusted by the public.

The website also provides shareholders and equity investors the tools to build an ethical framework to accomplish responsible ownership goals by providing transparency into the companies they own.

According to Andrew KcKeon, Gus Levy, one of the legends of 20th Century finance and an icon in the growth of Goldman Sachs, in response to a question about his firm’s motivations once said, “Yes at Goldman we are greedy. But we’re long-term greedy.”

Perhaps it’s time Goldman Sachs put its money where it’s mouth is!

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About zethics
CEO and founder of zEthics, Inc. Thirty years of experience with finance and accounting background in public private sectors.

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