Wednesday, May 12, 2010

Why Pick on Goldman?


Frank Partnoy, a finance professor at the University of San Diego, writes in the FT of May 11 that the SEC has unfairly targeted Goldman Sachs for censure in an act of "misguided political theatre." For Partnoy, Goldman is being punished for its success. In his counter-factual, if everyone had taken the positions Goldman had on sub-prime, we wouldn't be in this mess. I'm no philosopher -- or economist -- but I'm not sure that such a counter-factual world exists in the realm of possibility. But the core of Partnoy's case is that the SEC is not doing its job, which is to protect "investors." By going after Goldman, the SEC is advocating for "European banks" instead of Joe Six-Pack. Never mind that Joe Six-Pack, if he's lucky, has his retirement tied up with the fortunes of some of these "European banks." What Partnoy and others no doubt are really mad about is Goldman being singled out.

So, is it legitimate for the government to prosecute selectively? Absolutely. The SEC is a law enforcement agency with limited resources with which to prosecute. They are bound to prosecute selectively, but what makes their selection legitimate is the discretion awarded to them in the law. Not that this discretion hasn't been challenged and circumscribed. For example, in 1996, the Supreme Court heard United States vs. Armstrong, et al. Christopher Armstrong and his co-respondents filed a motion for discovery or dismissal alleging that they were unfairly selected for prosecution on federal crack cocaine charges because they were black. The due-process and equal protection clauses of the Constitution are meant to protect against "invidious discrimination in the exercise of prosecutorial discrimination." In other words, there are limits on prosecutorial discretion. You can't prosecute somebody on the basis of race, for instance. But in the Armstrong case, the court ruled in favor of the government, confirming a broad, robust concept of prosecutorial discretion.

Targeting Goldman precisely because of their stature in order to deter other banks from similar misdeeds is entirely within the scope of prosecutorial discretion as confirmed in Armstrong. For Partnoy, "these government officials do not understand modern markets." On the other hand, his understanding of the law leaves something to be desired.


Zachary Goelman said...

Partnoy's complaint. I crack myself up.

Noah K said...

LOL. Zachary, I know, it's too good to be true. But you thwarted my attempt to make the post not be Jewish at all!

Noah K said...

Another case that is important in this respect is Oyler v. Boles, which the Supreme Court heard in 1962. In that case, defendants claimed that their due process and equal protection rights had been violated in West Virginia sentencing hearings. Basically, WV had/has a law that's three strikes and you get life, but this "habitual criminal statue" was only invoked by prosecution in some cases. The court ruled that prosecution has the discretion to file for that mandatory sentence in some cases, but not in others. The selection of the prosecution, in other words, did not violate the constitutional rights of those defendants who as the objects of selection were sentenced to life.

Amos said...

Would that apply to SEC cases, which are not criminal?

Noah K said...

I don't see why not. If anything, a fortiori, it would seem to me.