Goldman Sachs Fraud Case

Goldman Sachs Fraud Case

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Table of Contents TOC o “1-3” h z u HYPERLINK l “_Toc264926934” Table of Contents PAGEREF _Toc264926934 h 2

HYPERLINK l “_Toc264926935” Abstract PAGEREF _Toc264926935 h 3

HYPERLINK l “_Toc264926936” 1.0 Introduction PAGEREF _Toc264926936 h 4

HYPERLINK l “_Toc264926937” 2.0 Goldman Sachs Company PAGEREF _Toc264926937 h 6

HYPERLINK l “_Toc264926938” 2.1 Historical Background PAGEREF _Toc264926938 h 6

HYPERLINK l “_Toc264926939” 3.0 Goldman Sachs Company Fraud Case PAGEREF _Toc264926939 h 7

HYPERLINK l “_Toc264926940” 3.1 Implications of Goldman Fraud Case PAGEREF _Toc264926940 h 9

HYPERLINK l “_Toc264926941” 4.0 Conclusion PAGEREF _Toc264926941 h 11

HYPERLINK l “_Toc264926942” 5.0 Recommendations PAGEREF _Toc264926942 h 12

HYPERLINK l “_Toc264926943” 6.0 References PAGEREF _Toc264926943 h 14

AbstractOperations in financial institutions have over time been compounded with various complexities. The purpose of this paper is to review the impacts of fraud cases on how they can be prevented in light of Goldman Sachs Company. It reviewed various contributions to the subject under review by a host of authors. Findings indicate that the implications are wide and varied and range from economic losses at different levels to loss of credibility within the legal sphere and immense psychological effects to victims. The paper concluded that more than ever, financial institutions are liable to incidences of fraud. In order to curb similar malpractices, the Securities and Exchange Commission needs to be empowered to effect different policies in a timely manner. Besides, transparency and accountability needs to be enhanced at all organizational levels.

1.0 IntroductionIt cannot be disputed that globalization has had various effects on different facets of the corporate environment. More than ever, the commercial environment has increasingly become diversified in different ways. The free flow of products and information across the globe led to the emergence and development of the service industry. The service industry within the commercial sector offers a wide range of products to the consumer base. This is however also compounded by various complexities that undermine its credibility and ability to offer quality services.

In particular, the financial sector has suffered various shortcomings that stem from its inability to uphold utmost transparency and accountability. While this is partly contributed to by advances in technology, it is in most instances attributed to lack of credible systems within the respective organization. The sensitivity that is associated with financial dealings has further made it difficult for the affected organizations to secure the trust of clients once they have fallen victims of these shortcomings. This has culminated in immense losses in the financial sector and further curtailed the growth of the same. Perhaps the most critical issues pertain to the relative ethical concerns. Emergent research indicates that the surrounding ethical concerns have far reaching implications on the performance and overall credibility of the affected organization (Ellis 37).

Incidences of fraud in the financial sector have particularly been on the rise in the recent past. These have been contributed to by technological advancements and have led to significant financial losses. In most cases, employees of the financial institutions at different levels have been on the spot light for failing to undertake necessary precautionary measures to prevent the occurrence of such incidences. Together with the criminal investigation agencies, the media has also played a critical role in highlighting the concerns and educating the public about practical measures that can be undertaken to curb the practice. Despite this, research indicates that the incidences continue to be experienced in the financial sector.

Notably, this has affected various financial institutions at both the national and international levels. One of the organizations that have been under intense criticism for failing dismally to prevent fraud within its operations is Goldman Sachs. This paper analyzes ways in which the Goldman Sachs fraud case affects entrepreneurial activity, business ethics and trading activities. Various researches have been done concerning the topic and most of this has been brought forward by its prominence and dominance in the global market. This research paper will investigate and analyze whether, and to what degree, the fraud case affect Goldman Sachs entrepreneurial activity, business ethics and trading activities. The scope of this paper will cover the aspects of the fraud case in the company and ways in which it affect organization and entrepreneurial performance, productivity, and global trading. It will also consider possible solutions to the problem and ways in which it can be prevented in the future (Lange& Powell, 65).

2.0 Goldman Sachs Company2.1 Historical BackgroundGoldman Sachs is a financial and investment organization that is involved in global investment banking and securities .The firm participates in HYPERLINK “http://en.wikipedia.org/wiki/Investment_banking” hinvestment banking, HYPERLINK “http://en.wikipedia.org/wiki/Securities” hsecurities sales and management, HYPERLINK “http://en.wikipedia.org/wiki/Investment_management” hinvestment management, and other monetary services principally with institutional clients. The organization was founded in 1869 by Marcus Goldman and its headquarters are located in New York City at HYPERLINK “http://en.wikipedia.org/wiki/200_West_Street” h200 West Street in the HYPERLINK “http://en.wikipedia.org/wiki/Lower_Manhattan” hLower Manhattan area (McGee 47). At the moment the company has branches in key international financial centers and concentrates on financial services which include provision of HYPERLINK “http://en.wikipedia.org/wiki/Mergers_and_acquisitions” hmergers and acquisitions advice, insurance services, property and HYPERLINK “http://en.wikipedia.org/wiki/Asset_management” hasset management, and HYPERLINK “http://en.wikipedia.org/wiki/Prime_brokerage” hprime brokerage to its customers, which include multi national HYPERLINK “http://en.wikipedia.org/wiki/Corporation” hcorporations, states and HYPERLINK “http://en.wikipedia.org/wiki/Government” hgovernments and individuals. The firm also participates in HYPERLINK “http://en.wikipedia.org/wiki/Proprietary_trading” hproprietary marketing and dealing and HYPERLINK “http://en.wikipedia.org/wiki/Private_equity” hprivate equity arrangements and is a HYPERLINK “http://en.wikipedia.org/wiki/Primary_dealer” hchief trader  in the HYPERLINK “http://en.wikipedia.org/wiki/United_States_Treasury_security” hUnited States Treasury security market. The company is credited to have produced some of the greatest United States secretary of the treasury for example, Robert Rubin and HYPERLINK “http://en.wikipedia.org/wiki/Henry_Paulson” hHenry Paulson who served under President HYPERLINK “http://en.wikipedia.org/wiki/Bill_Clinton” hBill Clinton and Paulson under HYPERLINK “http://en.wikipedia.org/wiki/George_W._Bush” hGeorge W. Bush respectively (Baker, 56).

The company having massive impact in the market world made a name for itself by pioneering the use of commercial papers for entrepreneurs and this was the major reason why it was invited to join the New York stock exchange (NYSE) in the year 1896. In the company history, one of the most achievements it experienced was its own initial public offer in 1999. The idea to go public was a long term deliberation that made some of its employees, partners and non-partner members own part of the company.

At the dawn of the new century, Goldman Sachs was financially stable and could support its operations accordingly. However, its operations hit the rock in 2001 when it experienced major employee cuts. In addition, it is indicated that the company spent a significant $7 billion in acquisitions (Jones & McDonalds 72). The September eleventh attacks had massive impacts on the company operations as it reduced both the revenue and earnings of the same. The faltering of the IPO and merger activities in 2002 increased the vulnerability of the company. Despite the inherent challenges, the company’s leadership announced that the company did not have any merger plans and could carry on the operations individually. Considering the fact that the company has a reputation for success, it is believed that it would easily address the challenges with ease and prosper in its activities.

3.0 Goldman Sachs Company Fraud CaseAs many people are currently aware, Goldman Sachs has been charged with fraud by the Securities and Exchange Commission’s. The government has categorically accused Goldman Sachs of the criminal activity of defrauding it customers by failing to disclose that it has a conflict of interest in mortgage investments it sold during the period when the housing market was faltering. The Securities and Exchange Commission (SEC) filed civil charges against the company and one of its executives. The commission alleges Goldman Sachs failed to divulge in details that one of its customers assisted in creation and then bet against the subprime mortgage securities that the company sold to investors (McEwan 34). Also, the company was accused of promoting and pushing a mortgage investment that was secretly devised to fail. Rough estimates show investors in the mortgage securities could have lost more than one billion US dollars.

SEC alleges the company deliberately misled potential investors by failing to disclose that the hedge fund manager John Pauson made billions of dollars by betting against the housing market and he selected company’s assets that went into a complicate security called “abacaus”. Essentially, Goldman Sachs informed e investors that ACA Management, which was a third party, had reportedly selected the pools of different subprime mortgages that were employed in the creation of securities. These are commonly referred to as synthetic collateralized debt obligations. In filing the civil suit, the Securities and Exchange Commission (SEC) targets one of the banks that, was bailed out with the help of taxpayer money, and later withstood the financial crisis and came out stronger than before (Robb, 32). Further, Ellis indicates that the SEC sought to recoup the financial resources that had been lost by the investors as well as impose an unspecified amount in civil fines against Fabrice Toure, who was the chief executive of Goldman Sachs (Ellis 56).

The case concentrates and counters one of the key causes of the financial crisis which was the establishment of investments and savings resulting from home loans allocated to borrowers who could not afford the houses they were buying. The suit goes beyond the possibility of banking but also concentrates on issues of business ethics since this bankers where much aware they were selling lethal financial products that could endanger the financial system but were much concerned with the money they would earn by doing so.

The Securities and Exchange Commission’s fraud case against Goldman Sachs creates a variety of challenges. In terms of SEC, it appears to be one of its first lawsuits that address sales of securities based on subprime mortgages and also the case involves one of Wall Street’s most prominent and dominant bank. In any way you view it, this is a significant case. Different to most S.E.C. enforcement actions, the Goldman’s case failed to close with a resolution between the two sides. Since SEC, was earlier held responsible for not discovering the Bernard Madoff Ponzi scheme in a timely fashion, the agency was so much gritty to bring down on Goldman Sachs in order to defend its reputation and restore public confidence in its performance. After the global recession, the alarm bell for tight financial regulation cropped up hence needs to counter such events. This was also a contributing factor to why SEC acted swiftly (Allen 22).

3.1 Implications of Goldman Fraud CaseGoldman fraud case has had far reaching implications on the financial sector and it exposed various weaknesses that have compounded operations in this sector for a significant period of time. In particular, issues of transparency, accountability and professionalism when dealing with different financial operations were brought to the fore. The ethical and professional implications indicated that the sector has a long way to go with regards to ensuring that necessary precautions are in place. Also worth mentioning is the concern about the specific roles that different institutions and parties play in the financial operations and deals. Perhaps the most important aspects pertain to the policy implications and the purpose of different parties in relative formulation, implementation and enforcement of policies that are employed in regulating the financial operations in this sector.

Goldman Sachs fraud case filed by the Securities and Exchange Commission (SEC) is barely easy to follow for most individuals; nevertheless it is a concept affecting every individual in the society. Uncertainties about the fraud charges against Goldman Sachs have rattled stock markets globally and have forced investors to search for less speculative international currencies (Allen 22). Goldman Sachs in this case has experienced immense losses as its client base has increasingly grown skeptical about its operations. These have had negative spillover effects on the employees and other sectors that either directly or indirectly depend on this organization or and partner with it for different businesses. Being one of the main financial institutions in the country, it is worth noting that this had negative effects on the entire financial and economic status of the country. In his review, Baker posits that it plunged the country in an economic recession (Baker 78).

The case has also contributed to the wave of risk aversion across financial and securities markets. More than ever, institutions and organizations are taking precautionary measures with regard to financial security. Statistical evidence shows that client preferences are shifting towards more credible organizations with respect to financial security and stability. The level of criticism according to recent research has increased profoundly in line with the market standards and regulations. The suit have made world stocks hit a new year high since the impact of global recession. The MSCI’s all-country world index fell down by about 0.78 percent, and more unstable emerging market component .MSCIEF closed at 2.98 percent (Jennings 49).

Another lasting impact of fraud include global economic decline due to weak dollar. In this regard, LeClaire, Ferrel and Fraedrich indicate that the entire nations of the globe have suffered devastating effects with regard to financial markets (LeClaire, Ferrel and Fraedrich 2). The relative impacts have also adversely affected the economic wellbeing especially of developing economies. Then, investors and prominent corporations are also cited to have experienced immense economic losses. According to Ellis, the losses culminate in not only curtail economic growth and development through incidences of unemployment and low productivity but they also impact upon the credibility of the renowned organizations (Ellis 66). The resultant reduction in the rate of investment has negative impacts on populations and respective organizations that depend in various ways to the contribution of the investors to effective organizational operations.

Of great reference however are the emotional and psychological implications of the fraud to the victims. Loss of significant financial resources can lead to incidences of stress and depression. The inherent loss of trust can impact negatively on the overall performance of financial institutions. In most circumstances, the emotional and psychological effects fraud can have on a victim are perhaps the most troubling (LeClair et al 67). Unethical behavior in part of the management has established the company as corrupt and most of investors would not want to be associated with it. This implies that the company is likely to suffer losses in future as clients, investors and credible professional are likely to refrain with associating with the company in any way. At this point, Lange and Powell note that employees from this company may also suffer defamation and are likely to experience difficulty in alternative employment (Lange & Powell 72).

4.0 ConclusionAs it has come out from the preceding analysis, the financial institutions have suffered various shortcomings that are related to incidences of fraud. In sum, fraud impacts negatively on the performance of an organization. It increases employee turnover and reduces investment and overall productivity of the affected organization. Good ethical conduct is important to the success of any organization. Definitely, there are many organizations that still believe that unethical business practices will not be revealed and there will be no negative business repercussions.

With the swift action of Securities and Exchange Commission (SEC) in fact, we will most likely see more ethical lapses among key organizations in the future. A company that behaves ethically and practice good business techniques encourages other organizations and associates to behave the same. If the company was not faced by few greedy executives, the organization could have moved forward establishing a massive business entity. The following recommendations offer useful insights with respect to how the issue can be resolved in a sustainable manner and prevented from reoccurring in future.

5.0 RecommendationsIn future, this type of fraud can be prevented by giving the Securities and Exchange Commission (SEC) more powers and teeth. This would be instrumental in empowering it to undertake stringent measures against organizations that engage in similar malpractices. Most importantly, this would enable it to undertake timely measures in partnership with other institutions in order to counter similar incidences and prevent relative losses. If the institution is given a chance to formulate important policies and implement them, this would ensure that all dimensions of financial fraud are addressed accordingly. In order to enhance performance after empowerment, the institution needs to be allowed to run its operations autonomously; without the interference of other institutions.

Also, investors should be careful and knowledgeable of any transaction they engage in. Investors should not trust banks whole heartedly as they are liable to financial fraud. Since Financial institutions have the obligation to proper and broader financial system. Fraud can be prevented by creating a healthy, well functioning System. Changes should also be made that collectively raise neglected questions about whether some of the market trends really serve the investors and public’s long-term interests (Jennings, 45). Meaningful changes and effective reform are very important and should naturally emanate from the lessons learned. Regulatory guideposts should be implemented to help improve the broader systemic management of risks, and increase the level of company accountability in order to enhance investor and public confidence.

By all means, risk and control functions needs should be totally independent from the business units. There should be clarity as to who risk and control managers report to and what channel of command is followed to avoid blame games as well as maintaining that independence. The monetary, investment and underwriting standards should be subject to more dynamic regulation. Supervisory bodies should critically consider the regulatory inputs and outputs required in order to ensure a market regime that is nimble and strong just as the Federal government controls interest rates to prevent economic frenzy, various standards and ratios should be well and appropriately calibrated. Finally there should be increased transparency in all investment banks dealing to ensure customer satisfaction (Jones Clark, Macdonald Parker, et al, 234).

Finally, future research regarding the aspects of the fraud cases in financial markets and ways in which they affect institutional operations and entrepreneurial performance, productivity, and global trading need to be undertaken in a comprehensive manner. The findings should then be employed in devising suitable practical measures that can effectively bridge the intrinsic gaps. In order to attain optimal output, all, stakeholders need to be allowed to actively participate in decision making at the end of the study. This would ensure that the final deductions and decisions are informed and sustainable in nature.

6.0 ReferencesAllen John R.L. ‘Act Responsibly: Corporate good deeds help communities and build long term business’, Nation’s Restaurant News, 38(36), 22. Purchased and Retrieved 4th June, 2010 from: HYPERLINK “http://archives.lf.com/preview.cfm?ID=2004250169922&SC=Act+Responsibly&CFID=34 42278&CFTOKEN=41845483” http://archives.lf.com/preview.cfm?ID=2004250169922&SC=Act+Responsibly&CFID=34 42278&CFTOKEN=41845483

Baker George. ‘From a pioneer to a pariah as Golden Arches celebrates 50 years’, Times Online, April 16. Retrieved 9th June, 2010 from: HYPERLINK “http://www.timesonline.co.uk/article/0,,11069-%091571623,00.html” hhttp://www.timesonline.co.uk/article/0,,11069-1571623,00.html.

Ellis Charles. The Partnership: The Making of Goldman Sachs. USA: Penguin (Non-Classics), 2009.

Jennings Mckenna. Business: its legal, ethical, and global environment. New York: Cengage, 2006

Jones Clark and Macdonald Parker. For Business Ethics: A Critical Text. London, Routledge, 2005.

LeClair Debbie , Ferrel.O.C., Fraedrich John. Integrity Management. Florida: University of Tampa Press, 2009.

Lange David and Powell Jefferson. No Law: Intellectual Property in the Image of an Absolute First Amendment. California, Stanford Law Book, 2010.

McEwan, Tom. Managing Values and Beliefs in Organizations. New York: Prentice Hall, 2001.

McGee Suzanne. Chasing Goldman Sachs: How the Masters of the Universe Melted wall Street Down and why They’ll Take us to Brink Again. USA: Crown Business, 2010.

Robb John. Global HYPERLINK “http://globalguerrillas.typepad.com/globalguerrillas/2010/04/journal-goldman-sachs-charged-with-fraud.html” hJOURNAL: Goldman Sachs Charged with Fraud. Retived on June 9, 2010 from: HYPERLINK “http://www.typepad.com/services/trackback/6a00d83451576d69e201347fecac0a970c” hhttp://www.typepad.com/services/trackback/6a00d83451576d69e201347fecac0a970c.

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