Goldman to Detail Fraud Defense Soon, Despite SEC Settlement Rumors

All the rumors of a settlement between the Securities and Exchange Commission and Goldman Sachs are overblown, at least for the foreseeable future, as a report from CNBC shows.

According to the network, Goldman is preparing to file a detailed answer to the SEC's complaint, and actively pursue discovery, believing it has far more to gain than lose in that process. The investment bank would be right in that, because while the SEC already has a ton of Goldman's documents, Goldman doesn't have the SEC's. In standard commercial litigation, settlements almost always follow discovery because discovery is how each side gets a relatively accurate read on the strength of its case: The cards are on the table. Facilitating a settlement is a primary purpose of discovery.

So there's nothing surprising in the idea that settlement talks won't heat up until after discovery occurs. But beyond that, there's a much bigger obstacle to reaching a settlement in this case: Both sides desperately need to come out the "winner." Goldman is already losing clients in the wake of all the revelations of how its proprietary trading conflicted with clients' interests. Imagine the impact if the company is forced to admit to fraud in a settlement.

I don't see how Goldman can sign off on a settlement that suggests wrongdoing on its part. It might accept a big fine, but only if there's a denial of wrongdoing attached. Conversely, the SEC can't afford to let Goldman walk away with just a fine. The agency is trying to resurrect its "cop on the beat" image, and in this era of virulently anti-Wall Street sentiment, accepting a settlement that lets Goldman off the culpability hook, even with a big fine, won't satisfy the public.

That said, if discovery shows both sides that Goldman has a good chance of acquittal at trial, the SEC will have to settle: It can't risk a total loss. At that point, the SEC's best method for saving face will be implementing tough, but effective, new rules, perhaps coming to other settlements with the financial industry that restructure how business gets done, and pushing through other reforms of the Street.

If it does those things, a loss in the Goldman case -- again, I'm defining a settlement in which Goldman pays a big fine, but doesn't admit wrongdoing as a loss for the SEC -- can be spun as resulting from the prior regime of weak rules and weak enforcement. But for that spin to be effective, the settlement with Goldman would have to take place after the SEC has effectively put Wall Street on better behavior -- and that won't be a quick process. In short, I don't see any drivers for a quick settlement that are strong enough to override the forces against one.

I'm eagerly awaiting Goldman's answer to the SEC's charges. Its statements so far haven't been compelling. Will it be as tone deaf as some of Goldman's congressional testimony? Or will it persuade the markets that the SEC's case is fatally flawed? According to CNBC, the answer is at most a couple of weeks away.