The Goldman Sachs Scandal

The Goldman Sachs scandal
Submitted to : submitted by:

Prof. Mani Thomas Shruti Kohli
09BS0002269
Introduction
The Goldman Sachs Group, Inc. is a global investment banking and securities firm which
engages in investment banking, securities,investment management, and other financial
services primarily with institutional clients. Goldman Sachs was founded in 1869 and is
headquartered at 200 West Street in the Lower Manhattan area of New York City, with
additional offices in major international financial centers. The firm provides mergers and
acquisitions advice, underwritingservices, asset management, and prime brokerage to its
clients, which include corporations, governments and individuals. The firm also engages
in proprietary trading and private equity deals, and is a primary dealer in the United States
Treasury security market.
Former employees include Robert Rubin and Henry Paulson who served as United States

Secretary of the Treasury under President Bill Clinton and under GeorgeWBush respectively.
The business ethics principle of goldman sachs

Our clients' interests always come first.
Our assets are our people, capital and reputation
Our goal is to provide superior returns to our shareholders.
We take great pride in the professional quality of our work.
We stress creativity and imagination in everything we do.
We make an unusual effort to identify and recruit the very best person for every job.
We offer our people the opportunity to move ahead more rapidly than is possible at most
other places.
We stress teamwork in everything we do.
The dedication of our people
We consider our size an asset that we try hard to preserve.
We constantly strive to anticipate the rapidly changing needs of our clients and to develop
new services to meet those needs.
We regularly receive confidential information as part of our normal client relationships.
Our business is highly competitive, and we aggressively seek to expand our client
relationships.
Integrity and honesty are at the heart of our business
The scam
In 1986, David Brown was convicted of passing inside information to Ivan Boesky on a
takeover deal. Robert Freeman, who was a senior Partner, who was the Head of Risk
Arbitrage, and who was a protégé of Robert Rubin, was also convicted of insider trading, for
his own account and for the firm's account.
Goldman Sachs created collateralized debt obligations (CDOs), sold them to investors, and

then bet short against them. The mortgage backed CDOs sold by Goldman performed very
poorly. It uses the example of the Hudson Mezzanine CDO, which Goldman bet against, but
also sold to investors. It also claims that various rules regarding CDO-default pay outs were
modified to favor short sellers in 2005.
On April 16, 2010, the Securities and Exchange Commission (SEC) announced that it was
suing Goldman Sachs and one of its employees. The SEC alleged that Goldman materially
misstated and omitted facts in disclosure documents for a synthetic CDO product it originated
called Abacus 2007-AC1. Goldman was paid a fee of approximately US$15 million for its
work in the deal. The allegation is that Goldman misrepresented to investors that an
independent selection agent, ACA, had reviewed the mortgage package underlying the credit
default obligations, and that Goldman failed to disclose to ACA that a hedge fund, Paulson &
Co., that sought to short the package, had helped select underlying mortgages for the package
against which it planned to bet.
What could have been done to avoid it ?

The case is about insider trading and disclosure of facts. In this case following steps must be
taken for insider trading:
 Implement a personal trading policy within the firm. Make it clear to employees what
they can and what they can't do in relation to the trading of securities in their personal
accounts. Determine which employees are ‘'covered'' by the policy.
 Distribute the policy to employees on a regular basis and have employees attest that

they have read and that they understand the policy.
 Create a restricted list of securities which employees are prevented from trading in.
This list should cover all securities with which the firm posses insider information or
which the firms portfolio is actively trading in.
 Implement a trade-pre-clearance process within the firm. Make sure that all covered
employees obtain permission prior to placing a trade in a ‘covered' security.
 Have ‘covered' employees submit a list of their accounts and the accounts of all direct
family and the accounts of individuals over whom they have discretionary authority.
Have each employee attest that this is a full list of their accounts.
 Have all employees submit copies of their trade confirms and brokerage statements to
the compliance department on a monthly basis.
Disclosure of facts:
The case was also of disclosure of facts. In this case all the necessary facts must be
disclosed to the investors and the related parties as it was the duty of Goldman sachs
for which it has taken US$15 million. But on ethical ground goldman sachs has
proved to be very wrong .
What are covered securities?
A class of securities, created by the National Securities Market Improvement Act, that
enjoys federally imposed exemptions from state restrictions and regulations. Most stocks
trading in the U.S. are covered securities.
Recommendation:
In the above case it was not only the matter of the companies’ image or the legal issues
involved with it which would effect company`s postion but also on ethical ground it broke the
trust of the investors in terms of the trustworthy company in which they were investing their
money which was termed as world`s biggest investment bank. And even in the mind of the
general public they broke the trust.
In this case I would have studied the full case and if Goldman sachs was found guilty than on
ethical ground it was the prior duty of the company to compensate the investor, as there is no
shortage of funds to the company. As we go by the present status of the company the
company is generating high profits.
If they compensate their investors their public image as well as their company`s image will
be retained.
For future prospective a internal as well as outsider auditor committee must be formed so that
these type of scams of insider trading and misrepresentation of details to the dealing parties
can be avoided.

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The Goldman Sachs scandal

Submitted to : submitted by:

Former employees include Robert Rubin and Henry Paulson who served as United States

The business ethics principle of goldman sachs

Goldman Sachs created collateralized debt obligations (CDOs), sold them to investors, and

What could have been done to avoid it ?

 Distribute the policy to employees on a regular basis and have employees attest that

What are covered securities?

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