Tuesday, April 20, 2010
The SEC (Securities Exchange Commission) has finally, finally brought civil charges against Goldman-Sacs. To sum up the case Goldman-Sacs made mortgage derivatives that they knew would fail (legal) and sold them to their investors (legal) and used their own money to bet against them (legal) but didn’t disclose in the prospectuses that might bet against the securities they were selling (illegal).
I’ve actually had to deal with the SEC and when the company I worked for was audited there was only one criteria, our prospectuses needed to be self consistent. That was it, we didn’t need to show any proof of what we were selling only that the prospectuses didn’t contradict themselves. At the time I thought it was down right amazing that any company got caught, and they did bag one of our competitors each year.
In order to go farther than that an investor would actually have to start the investigation themselves and provide evidence that we didn’t attempt to honor our prospectus, in our case it was oil wells and if we drilled the number of holes we said we would more than 200ft (below the water table) we were legally clear.
Amazingly, we were under STRICTER rules than big banks like Goldman-Sacs. They were able to legally pick who would be investigating them.
It was no secret then that the large investment firms were doing things to rip off their customers, The classic rounding scheme was to delay processing customers orders for several minutes (credit checks and the like) and when the computers saw enough orders to push the price of the stock up they would buy large amounts of that stock so when the customers orders went through they would be buying at a higher price, giving the investment firms a quick 1-2% profit. Sometimes the day-traders would pick up on this and send the price even higher so a stock could bounce 5-10% in a few hours and the investment firm could pull out at the top pocketing the cash, the day traders would do the same and the stock would be back to where it started. The wild ride the stock took during the day would actually devalue the stock in the future. So as good investors invested in good companies the investment firms would work to devalue those companies.
They could get away with this because no one was allowed to examine their accounting books. If Bernie Maddoff had his books looked over for 10 minutes a CPA fresh out of college would be able catch what he was doing. The scheme I described wouldn’t be able to take place. And closer to home for me, they would have caught the fact that my boss was spending more than our 50% administration cost on personal stuff.
It wouldn’t need to be a lengthy investigation, an allowing an accountant a few hours per $10 million raised for investment projects would make investment companies put some effort into being crooked. And if they had to work to make money crookedly they might want to put that work into doing it legitimately.