08/02/2013 07:42 pm ET Updated Oct 02, 2013

The Goldman Affair: What Is the SEC Trying to Say?

I recognize to have reacted with anger and disappointment to the Court judgment on the Goldman Sachs case for which "without admitting any wrong doing", Goldman Sachs paid a $550 million fine. The hypocritical statement that has become a protection against civil suits has landed billions of dollars of fines to the SEC.

A junior trader of Goldman Sachs, Fabrice Tourre, the self-proclaimed "Fabulous Fab" who became a symbol of Wall Street's role in the financial crisis, was found liable for fraud today after a two-week trial in a Manhattan federal courtroom. The fraud amounts to $1 billion, which means that the underlying assets were a multiple of this amount.

The case was initiated by the Securities and Exchange Commission.
Furthermore, "Being 28 years old and one of several employees of Goldman Sachs isn't a defense," Tom Gorman, a former lawyer with the Securities and Exchange Commission's Enforcement Division, who is now in private practice, said in an interview. Tourre was a highly paid specialist working in a particular area who asked people to invest billions of dollars in a product he created, Gorman said. Tourre's lawyers portrayed him as a young employee who was one of many Goldman Sachs employees who worked on the 2007 deal known as Abacus that had subprime mortgage-backed securities underlying the transaction.

Being young is not an excuse, but in a case where Goldman Sachs is prepared to pay $550 million, is it fair to focus exclusively on a trader? At 28, you report to a hierarchy. If you go to your boss and tell him "I cannot do this, it is unethical", you are sure of one thing: You will be fired. Nobody who has been remotely involved in trading knows how obnoxious and arrogant bosses are in this particular field. They take no prisoners. It was the case for Kerviel at Societe generale. It was not the case of JPMorgan Chase with the London Whale where the top CIO executive resigned.

Is the SEC sending a message that middle management should not execute instructions?

What about John Paulson?
The SEC accused Mr Tourre of hiding from investors the fact that Paulson & Co -- a hedge fund run by billionaire John Paulson -- helped select the mortgages referenced in the "synthetic collateralized debt obligation" and then bet against it, said the FT, whose headline is SEC elated after claiming Tourre's scalp.Does the SEC want us to believe that the composition of the product was discussed secretly between a trader and John Paulson, one of the most important hedge fund clients of Goldman Sachs?

None of the major Wall Street leaders who ruined their shareholders or bankrupted their companies have even been brought to Court by a fearful SEC. Why haven't the SEC lawyers held Wall Street accountable? Asks the New Yorker.

Disastrous long-term consequences.
Beyond this case, a new question needs to be addressed: how accountable are the superiors of failing employees? Are employees supposed to second-guess the instructions they receive from their superiors?

This casts a dark shadow on another mysterious affair that led a computer programmer to jail, sued by Goldman Sachs. Michael Lewis has something to say in Vanity Fair about this.