Just a few weeks ago, we posted an entry which took note of a recently-issued Securities and Exchange Commission (SEC) “Risk Alert” concerning industry compliance with with MSRB Rule G-37. That entry advised the regulated community to treat the Alert as a signal from the Commission that it was dissatisfied with the industry’s continued failures to comply with federal pay-to-play laws and closed with the following warning:
The wise among us would do well to heed this warning to straighten up and get formal compliance protocols in place along the lines of those singled out by the Commission for praise. Punishment is coming and this is our “don’t say we didn’t warn you” moment.
(Alas, it would now appear that I have accomplished the highly complex, and dangerous, “Narcissism Triple-Double Combination” by quoting myself twice, along with a self-reference to my own blog entry using the plural “we” in the context of setting up an “See, I was right” closing. Do NOT try this at home. It is very difficult and reveals numerous, significant flaws of character.)
Yesterday, the SEC revealed just how serious it was in announcing both charges and an agreement by Goldman Sachs to pay over $14 million in fines in a case that reveals the importance of formal compliance protocols and training for the regulated industry. The facts of the case, themselves, are noteworthy: Goldman Sachs banker Neil Morrison allegedly (Morrison is still under investigation and has not admitted violation – hence the need for employment of the ubiquitous “allegedly”) made numerous contributions to Massachusetts Treasurer Tim Cahill’s campaign for Governor. As we all know, MSRB Rule 37 thus debarred Goldman from engaging in Massachusetts municipal underwriting for a period of two years and further imposed significant disclosure obligations on the bank, all of which were unwittingly violated when the bank engaged in another 30 prohibited underwritings with Massachusetts underwriters after Morrison’s activities.
Several significant lessons must be learned from this case.
First, what makes this case so noteworthy, and in a subtle way, is that the Commission chose to impose such a significant penalty upon an entity that had trained Morrison on Rule G-37, discovered, and then self-reported the violation on the ground that Goldman had failed to implement proper oversight procedures. In a statement, Goldman said it "detected Morrison's activities, promptly alerted regulators, terminated his employment, and fully cooperated with the investigations." Morrison was purportedly "discharged" because of "allegations involving outside activity without preapproval." Goldman’s coffers are $14 million lighter today nonetheless. As noted by the Commission’s triumphant press release:
The [SEC’s order against Goldman Sachs] found that Goldman Sachs did not disclose any of the contributions on MSRB Forms G-37, and did not make or keep records of the contributions in violation of MSRB Rules G-37(e), G-8 and G-9. The order found that Goldman Sachs did not take steps to ensure that the attributed contributions or campaign work or the conflicts of interest raised by them were disclosed in the bond offering documents, in violation of MSRB Rule G-17, which requires broker-dealers to deal fairly and not engage in any deceptive, dishonest, or unfair practice. The order found that Goldman Sachs failed to effectively supervise Morrison in violation of MSRB Rule G-27.
Second, the “contributions” triggering application of Rule 37 were not simply traditional contributions of money. Rather, the offending contributions were “in-kind” contributions of services of value to the campaign by Morrison “that were attributable to Goldman Sachs” such as the drafting of speeches, media services, and other administrative services to the campaign. That such “volunteer” services rendered by an employee to a campaign could result in an eight-figure fine to one’s employer is not intuitive to all employees. This fact underscores the absolute imperative that any underwriter subject to Rule 37 cannot simply implement the oversight protocols called for by the Commission. Direct training of all covered personnel as to the nuances of the law is mandatory. Here, it was the mere use of bank resources in service of the campaign that resulted in the largest ever penalty imposed by the Commission for a pay-to-play violation:
“The pay-to-play rules are clear: municipal finance professionals that use their firm’s resources to campaign on behalf of political candidates compromise themselves and the firms that employ them,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.
The time has come to take the Commission and Rule G-37 seriously. Let’s all wipe the sweat off our collective brows, say our obligatory “that could have been my company,” and get about the work of ensuring that our compliance procedures are in place and our folks are trained.