Why is Goldman Sachs in Trouble with the SEC?

Thursday morning, the U.S. Securities and Exchange Commission charged Goldman Sachs (NYSE:GS) and one of its former investment bankers with giving undisclosed campaign contributions to then-Massachusetts state treasurer Timothy P. Cahill during his bid for governor.

The SEC said the alleged infringement was a “pay-to-play” violation, which, according to the regulator’s press release involves, “campaign contributions or other payments made in an attempt to influence the awarding of lucrative public contracts for securities underwriting business.”

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Goldman Sach’s violation marks the first time the SEC has enforced the pay-to-play violation involving “in-kind” non-cash contributions to a political campaign.

According to the SEC’s charges, vice president of the firm’s Boston office, Neil M.M. Morrison, was “substantially engaged” in working on Cahill’s political campaign from November 2008 to October 2010, at which time he conducted campaign activities from the Goldman Sachs office. To the SEC, his use of the firm’s work time and resources for campaigning constituted a valuable in-kind contribution to Cahill, which disqualified Goldman Sachs from engaging in municipal underwriting business with certain Massachusetts municipal issuers for two years after the contributions. However, Goldman Sachs participated in 30 prohibited underwritings with Massachusetts issuers, which earned the firm more than $7.5 million in fees.

The actions of Goldman Sachs and Morrison were a clear violation of the SEC’s pay-to-play rules, said the Director of the SEC’s Division of Enforcement, Robert Khuzami, in a press release issued by the regulator.

“Fighting efforts to improperly influence the underwriting selection process is one of the unit’s top priorities,” said Elaine C. Greenberg, Chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit. “These practices result in undisclosed conflicts of interest and undermine public confidence in the integrity of the municipal securities market.”

Goldman Sachs has consented to the SEC’s order without admitting or denying the charges. While the case against Morrison continues, the firm has agreed to settle the charges by paying $7,558,942 in disgorgement, $670,033 in prejudgment interest, and a $3.75 million penalty, which is the largest ever imposed by the SEC for pay-to-play violations.

The current SEC rules regarding pay-to-play violations were adopted in June 2010, when the regulator adopted new measures to curtail campaign corruption.

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