Goldman Sachs' Obscene Bonuses

 

The Sarbanes-Oxley Act, also known as the Public Company Accounting Reform and Investor Protection Act, was designed to protect the American public from fraudulent accounting practices and insider trading in publicly listed stocks. 

Sarbanes-Oxley was signed into law on July 31, 2002- in response to fraudulent accounting practices at ENRON, WorldCom, Adelphia, etc.  It has received the name Sarbanes-Oxley after Senator Paul Sarbanes (D, Md.) and Representative Michael Oxley (R, Oh.).  Both Senator Sarbanes and Representative Oxley retired in 2006.

The intent of Sarbanes-Oxley was to provide rigorous accounting standards and to ensure that the chief executives of these publicly held companies are held responsible for any violations of Sarbanes-Oxley by requiring that the chief executive officers sign the financial statements of these companies.  Sarbanes-Oxley also strengthened civil and criminal penalties for violations of federal securities laws. 

The question presented here is:  Has Goldman Sachs violated the Sarbanes-Oxley Act by not properly accounting for the disastrous purchase of Spear Leeds and Kellogg?

This questionable accounting began in 2001, when Goldman Sachs began to suffer large losses in its specialist operations which had been acquired by Goldman Sachs when it purchased Spear Leeds and Kellogg on October 31, 2000. At the time of this questionable accounting Henry Paulson, currently Secretary of the Treasury, was Chairman of Goldman Sachs; and John Thain, currently Chairman of the New York Stock Exchange, was President of Goldman Sachs. Currently, both Secretary Paulson of the Treasury, and Chairman Thain of the New York Stock Exchange, are calling for a stripping down of the Sarbanes-Oxley Act. Are Paulson and Thain propounding this weakening of Sarbanes-Oxley to cover up Goldman Sachs’ violation of Sarbanes-Oxley?

Goldman Sachs acquired Spear Leeds and Kellogg against excellent advice, specifically my advice, that Spear Leeds and Kellogg had for many years violated the Securities and Exchange Act of 1934. At the time of the acquisition of Spear Leeds and Kellogg by Goldman Sachs, I had been portrayed as a whistle-blower in the press, most notably in the 26 April 1999 BusinessWeek cover story, Scandal On Wall Street, and in the 9 August 1999 BusinessWeek article, A Street Scandal That May Not Die.

In A Street Scandal That May Not Die, (BusinessWeek, 9 August 1999), William Killeen, Chairman of Oakford Securities, who pleaded guilty to illegal trading at the New York Stock Exchange, stated that several managing directors of Spear Leeds and Kellogg, including Randy Frankel, Robert Luckow, Harvey Silverman, and Gary Goldring, knew of and assisted the illegal trading of Oakford Securities at the NYSE. (An illegal trade occurs when a NYSE floor broker trades for an account. NYSE floor brokers can only execute orders; they cannot trade for an account. Oakford had in excess of 100 NYSE floor brokers illegally trading for illegal brokerage accounts at Spear Leeds and Kellogg). 

In October 1999 I was informed by sources at Spear Leeds and Kellogg that Spear Leeds and Kellogg had been forced to postpone its discussed Initial Public Offering (IPO) because of the exposure of violations of federal securities laws by managing directors of Spear Leeds and Kellogg in two 1999 BusinessWeek articles, Scandal On Wall Street and A Street Scandal That May Not Die- for which I had supplied the information. 

On 18 October 1999 I wrote a letter to John Thain, who was then President of Goldman Sachs. In this letter I stated:  “I wish to state most emphatically that these articles merely scratch the surface and do not present even an outline of criminal activity,� referring to the Business Week articles.

“The involvement of managing directors of Spear Leeds and Kellogg at both the New York Stock Exchange and the American Stock Exchange is central to these three articles.�  The, Scandal On Wall Street, had exposed the fact that Pat Schettino, a managing director of Spear Leeds and Kellogg, had illegally traded stocks for the account of Bullseye Securities, including stocks in which Spear Leeds and Kellogg had served as the specialist, at the American Stock Exchange. 

Further along in the same letter to Thain, I stated:  “Spear Leeds and Kellogg is currently marketing itself as an acquisition candidate. I request that if you are representing Spear Leeds and Kellogg or the acquiring company to please have your legal department and your mergers and acquisitions department speak to me.� I then closed the letter, thus:  “I, therefore, request that you pursue due diligence and investigate all allegations of misconduct at Spear Leeds and Kellogg.� Sadly, I was never contacted by Thain or any of Goldman’s legal representatives.

In September 2000 Henry Paulson and John Thain announced that Goldman Sachs would acquire Spear Leeds and Kellogg. In a letter, dated 15 September 2000, which was addressed to Robert Katz, Secretary to the Board of Goldman Sachs, I provided specific instances of criminal activity by Spear Leeds and Kellogg and the involvement of several of the managing directors of Spear Leeds and Kellogg.  (A copy of this letter can be found on my website, WallStreetScandals.com, Part II.)  On 15 September 2000 copies of this letter were sent to Paulson and Thain at Goldman Sachs.

I also wrote a separate letter dated 15 September 2000, to Goldman’s Paulson, accompanied by a dire warning:  “In my letter to Mr. Katz, I delineate some of the massive and endemic criminal activity at Spear Leeds and Kellogg.�
Having received no response from any executive at Goldman Sachs, I then sent a letter, dated 26 October 2000, to the Hon. Lawrence McKenna, who was the presiding judge of a legal action involving price fixing in options by specialist firms, including Spear Leeds and Kellogg, at the American Stock Exchange. 

In this letter of 26 October 2000 I demonstrated price fixing in Exchange Traded Funds, including, SPY (which is the exchange traded fund for the S&P 500), an Exchange Traded Fund in which Spear Leeds and Kellogg was the specialist. Price fixing is a violation of federal securities laws- both criminal and civil. Copies of this letter to Judge McKenna were sent to Robert Katz in a letter, which was also dated 26 October 2000. 

Goldman Sachs ignored my warnings and purchased Spear Leeds and Kellogg on October 31, 2000 for a sum in excess of $7 billion.

On 26 November 2000 I proceeded to write another letter to Federal District Judge McKenna.  In this letter I once again demonstrated price fixing in Exchange Traded Funds (ETF), including the SPY in which ETF Spear Leeds and Kellogg, currently a division of Goldman Sachs, served as the specialist. A copy of this letter to Judge McKenna was once again sent to Robert Katz, Secretary to the Board of Goldman Sachs. Copies of the 26 October 2000 and the 26 November 2000 letters to Judge McKenna can be found on my website, WallStreetScandals.com Part II.

Spear Leeds and Kellogg continued price fixing in the SPY even after the Goldman acquisition. Thus, on 24 January 2001, I once again wrote to Judge McKenna and provided examples of price fixing in the SPY by Spear Leeds and Kellogg specialists.

The hoped for synergy between Goldman Sachs and Spear Leeds and Kellogg never materialized. By late 2002 practically all managing directors of Spear Leeds and Kellogg had been forced to leave Goldman Sachs.

On 12 May 2002 I sent a letter to James Schiro, Chief Executive Officer of Price Waterhouse Coopers, the public accounting firm, which audited the financial statements of Goldman Sachs.  In this letter I stated: “Goldman Sachs is covering up a massive write-off of approximately $3 billion due to its purchase of Spear Leeds and Kellogg.� (Goldman should have written off $3 billion for the purchase price because the Spear Leeds and Kellogg specialist units and other divisions were not earning sufficient monies).

After this letter was written Goldman Sachs closed down its specialist operations at the American Stock Exchange, except for the Exchange Traded Funds on the American Stock Exchange, and its specialist unit at the Philadelphia Stock Exchange. No action was ever undertaken by Goldman Sachs.  PriceWaterhouseCoopers did not respond to my letter.

On 22 May 2002 I also wrote to Eliot Spitzer, who was then Attorney General for the State of New York –now governor—and an avowed crusader for Wall Street reform, concerning the $3 billion write-off by Goldman Sachs. Spitzer took no action against Goldman Sachs.

Goldman Sachs did keep the Spear Leeds and Kellogg specialist unit for Exchange Traded Funds, including the SPY, and the Hull Specialist Unit for Exchange Traded Funds at the American Stock Exchange.

The value of the Spear Leeds and Kellogg specialist franchise at the New York Stock Exchange has declined dramatically. Robert Luckow, a former chief executive officer of the NYSE specialist unit of Goldman Sachs, has been banned by the NYSE (and has charged pending before the SEC), while another chief executive officer, Todd Christie, resigned from the NYSE. (An earlier version of this report stated incorrectly that he had been banned; he also has a SEC case pending).

To provide an example of the decline of the New York Stock Exchange specialist unit of Goldman Sachs, one has merely to compare the value of the NYSE specialist unit of Goldman Sachs with the stock price of LaBranche Securities from 1999, when Goldman Sachs purchased Spear Leeds and Kellogg, to the present. (LaBranche Securities is the largest specialist unit at the New York Stock Exchange and also has a large stock specialist unit at the American Stock Exchange. 

It is a stock against which the value of the Goldman Sachs specialist unit, formerly the specialist unit of Spear Leeds and Kellogg, can be accurately measured.)  LaBranche traded as high as approximately $50 and went as low as $6. Currently LaBranche (symbol:  LAB) is trading at approximately $9.25. At $9.25 the market value of LaBranche is approximately $525 million. LaBranche is a specialist operation. It has made redundant in excess of 50% of its workforce. LaBranche was forced to suspend its dividend. And when the Securities and Exchange Commission fined LaBranche for illegal trading, LaBranche had extreme difficulty making the payment. 

So, the New York Stock Exchange specialist unit of Spear Leeds and Kellogg, is currently valued at $600 million. The price paid by Goldman for the NYSE specialist unit of Spear Leeds and Kellogg included a premium.

Why you may ask did the NYSE specialist unit of Spear Leeds and Kellogg (Goldman Sachs) decline at a greater rate than the NYSE specialist unit of LaBranche?  Simple:  The illegal trading by SLK specialists caused Goldman to overpay when it purchased Spear Leeds and Kellogg. Goldman Sachs has refused to take a write-off with the knowledge that the Securities and Exchange Commission shall never force Goldman Sachs to acknowledge a $4 billion loss. 

Generally Accepted Accounting Principles, which are followed by all businesses that file tax returns, generally require that a loss be shown on the purchase of a business if that loss exceeds  10% of net income.  Thus, Goldman Sachs would have required a net income of $40 billion for Goldman not to be required to show its loss from the purchase of Spear Leeds and Kellogg as a separate item in Goldman’s financial statements.  And it is important to note that a loss exceeding 10% of net income must be shown as a separate item in the financial statements.

Let us examine the rationale behind Goldman’s refusal to take a write off.  A write off of $4 billion would first have to be deducted from the Balance Sheet of Goldman Sachs.  Then an accounting entry must be made so that this $4 billion would be deducted from the Income Statement.  A deduction of $4 billion from the Income Statement would mean that Goldman Sachs would earn $4 billion less.  Net Income would be reduced by $4 billion. The stock price of Goldman Sachs would decline.

Thus, the bonuses of the management of Goldman Sachs would be greatly reduced.  And questions would be raised concerning the purchase of Spear Leeds and Kellogg- with the real possibility of a shareholders lawsuit against the Goldman Sachs executives, such as Thain; Paulson, etc., and perhaps the Goldman’s several law firms, and the accounting firm of PriceWaterhouseCoopers.  (Sullivan & Cromwell received copies of my correspondence to Goldman, including my 15 September 2000 letter to Robert Katz). Perhaps Goldman believed taking a write-off would have been the ultimate embarrassment to Goldman Sachs and destroyed the reputation of Goldman Sachs- as well as the earnings of senior executives.

Most importantly Lloyd Blankfein the new Chairman who replaced Paulson, and Goldman current co-presidents Gary Cohn and Jon Winkelried, might not have received their bonus of $54 million this year. On 13 November 2006 I wrote to Blankfein, Gregory Palm, and Esta Estecher concerning the refusal of Goldman Sachs to take the write off as a result of the rapid decline of the Spear Leeds assets. I also wrote to Samuel DiPiazza, Chief Executive Officer of PriceWaterhouseCoopers, and stated that Goldman Sachs must take a write- off.  No one has responded to my letters.

Goldman Sachs did not respond to a phone call and a written request seeking comments or reaction. A spokesperson said the individual who could comment was traveling. 


Some New York City politicians are outraged by these stupendous bonus payments at Goldman. “In a town where there is 42% poverty in the South Bronx, 30 % poverty in Harlem, 29% in Central Brooklyn; in a town where you still have homelessness and you have thousands of hungry children; for these greedy and profiteering businessmen to give themselves these kinds of unimaginable and unearned bonuses is a sin before God,� said New York City Councilman Charles Barron.
 
Rev. Herbert Daughtry, pastor of The House of Lords church in Brooklyn, who often works on campaigns with Barron declared that the payments “borders on criminality in light of the pervasive poverty in New York City.�

Separately, another councilmember from Brooklyn, Letitia James, said: “These $54 million bonuses are excessive. They greatly exceed the amounts  paid to the lowest paid worker. It represents corporate greed at its worst. Compensation should be determined by an independent board. There must be a nexus between the highest paid worker and the lowest paid worker."

Henry Paulson and John Thain are vociferously advocating a stripping down of the standards of Sarbanes-Oxley.  As John Thain stated on 17 November 2006 in a Wall Street Journal interview:  “We need to move back from the attitude of which policeman can write the biggest ticket to a more of a let’s fix the problem and if there are individuals who break the law, let’s put them in jail.�

This is a prescient statement because criminal penalties are provided for those executive officers, who violate the provisions of the Sarbanes-Oxley Act. Where are the Chairman and Commissioners of the Securities and Exchange Commission and the United States Attorney for the Southern District of the State of New York of the Department of Justice?