Why Pick on Goldman?

By NOAH K

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.