SEC Investigation into Goldman Sachs (NYSE: GS) Questioned

In a well publicized case earlier this year, the Securities and Exchange Commission reached a settlement with Goldman Sachs (NYSE: GS) on alleged wrongdoing in a sale of mortgage securities called Abacus 2007 AC-1. Today, the SEC’s internal watchdog said the timing of the fraud lawsuit was “suspicious,” suggesting agency officials tried to distract attention from a report criticizing the SEC for failing to detect an alleged Ponzi scheme.

While the research was underway on Goldman Sachs, allegations have arisen that the agency had repeatedly missed chances to detect an alleged $7 billion fraud run by R. Allen Stanford, a money manager indicted by a federal grand jury last year. Mr. Stanford denies wrongdoing.

At a Senate Banking Committee hearing Wednesday, SEC Inspector General H. David Kotz was questioned about the timing of the Goldman suit. He responded: “It would strain credulity to think it was coincidental. I can’t give you a conclusion right now, but it was suspicious.” The comments by Mr. Kotz shine an unflattering spotlight on the SEC just as it has been showing signs of progress in revamping its embattled enforcement unit.

Frustrated lawmakers prodded financial regulators to rev up prosecutions of top executives and directors for criminal wrongdoing, complaining that it is taking too long to punish those responsible for causing or deepening the financial crisis. Sen. Edward Kaufman (D., Del.) commented, “I know that the Justice Department, the FBI, and the SEC have all been working incredibly hard, reviewing countless transactions, interviewing myriad witnesses, poring over literally millions of pages of documents. And yet we have seen very little in the way of senior officer or boardroom-level prosecutions of the people on Wall Street who brought this country to the brink of financial ruin. Why is that?”

Lanny Breuer, head of the Justice Department’s criminal division, said the real challenge is public perception. Although the agency has committed resources to the investigations, they are extremely complicated and not easy to decipher, even for many people who have worked in finance all their lives.

According to a tally by the SEC, the agency has filed 634 civil cases since its fiscal year began last October, extracted $968 million in penalties and distributed nearly $2 billion to investors. The Justice Department said nearly 3,000 defendants were sent to prison between October and June for financial fraud. The number of criminal mortgage-fraud cases filed by the agency has more than doubled so far this year compared with 2007, while new corporate-fraud cases also have surged. Although very few criminal charges have been filed against high-ranking executives often blamed for the crisis, perhaps that is next on the horizon.