The Case for U.S. Criminal Charges Over Goldman’s Greek Securities
Over and over again, the Greek government has stated that the currency trades that Goldman Sachs arranged to allow the Greek government to hide a portion of its debt were perfectly legal at the time, and that appears to be the case. But economist Simon Johnson has uncovered some information about to whom Goldman sold Greek securities that might, indeed, make Goldman criminally liable in the United States.
In 2002, Goldman Sachs was listed as one of the managers of 3.5 billion of bonds issued by the Greek government. Between 2000 and 2001, according to testimony in the UK by a Goldman executive, Goldman Sachs helped the Greek government arrange a number of off-balance sheet transactions that made Greece’s debt appear lower than it really was. While Goldman terms the amount “small but significant,” Johnson notes that the amount of debt Goldman helped Greece hide from the EU, investors and Greek taxpayers was 1.6 percent of Greece’s GDP.
The problem for Goldman is that it knew that Greece’s overall debt was significantly higher than it appeared, which is of material importance to the investors to whom Goldman was selling the Greek bonds. Johnson explains.
The April 2002 offering circular did not disclose the debt swaps. There may have been other documentation available to investors that did reveal true Greek debt numbers – and perhaps these were discussed in the relevant road shows. We are not here taking a position on what was and was not disclosed; this is a matter for a proper official investigation. We also do not know what the other involved banks knew and when they knew it.
If it were the case that Greece’s true debt levels were known and not disclosed by the investment bankers involved, any reasonable investor – or the sovereign debt experts with whom we have discussed this matter – would regard this as withholding adverse material information.
Withholding adverse material information is not a crime, apparently, in Greece, and the bonds were not registered in the United States, which would normally mean Goldman was free and clear.
But there’s one exception to that rule: Bonds sold to Qualified Institutional Buyers do require material adverse disclosures, regardless of where they were issued or whether they are registered in the United States — and analysts believe that at least 10 percent of the 2002 bonds were sold to such buyers, possibly by Goldman.
However, if any of these bonds were sold in the US to “qualified institutional buyers” (QIBs) under rule 144A (an exemption to registration requirements under the 1933 Securities Act), there is a potential legal issue (here I’m just rewording what Senator Kaufman said). Rule 10b-5, under the 1934 Securities Exchange Act, definitely applies to securities sold under 144A – i.e., selling securities to anyone in the United States while deliberately withholding material adverse information is not allowed.
Johnson allows that investors are unlikely to sue Goldman unless the bond defaults — and avoiding that is the purpose of the European Union bailing out Greece — and the statute of limitations might have expired for a criminal investigation.
On the other hand, it might not have, and no one will find out without an investigation. Perhaps if New York Attorney General Andrew Cuomo isn’t too busy investigating the governor he’d like to replace, he will get around to making a name for himself by taking on the universally despised Goldman.