The Securities and Exchange Commission's civil lawsuit accusing Goldman Sachs Group Inc. of securities fraud could strengthen the argument to establish a universal fiduciary standard, according to legal experts.
The case adds a "new dimension" to the debate over whether legislators should establish a fiduciary standard for everyone dispensing financial advice, Knut Rostad, the chairman of the Committee for the Fiduciary Standard, said during a conference call Wednesday.
"It is concrete and specific as to what it is, as opposed to the pitchfork-storming-Wall Street view of this," he said.
As it reveals Goldman's practices, the case could provide a clear contrast between the fiduciary standard and the suitability standard — something that has been confusing people thus far, Rostad said.
Given Goldman's pledge to defend its principles and practices and to fight the charges, the case affords an unvarnished view of what the world's leading investment banking firm believes, in part, is required of the suitability or fair-dealing standard, Rostad said.
If Goldman wins outright, he said, these practices will be affirmed in law.
The SEC's April 16 suit charges that the investment bank made "materially misleading statements and omissions" about a structured product sold to investors, and that it did not tell investors that the hedge fund Paulson & Co. had input in the selection of residential mortgages that were part of the structured product.
Paulson later made a $1 billion profit from this product by betting that the housing market would fall.
For its part, Goldman maintains that it is not a fiduciary. In testimony before the Financial Crisis Inquiry Commission on Jan. 13, Goldman's chief executive and chairman, Lloyd Blankfein, said the company was instead a "market maker" that sells products as a principle.
In other words, Rostad said, Goldman sees its position as that of caveat emptor, rather than as an adviser.
But James Cox, Duke University Brainerd Currie professor of law, said the fiduciary standard "would roll away some of the mist of what Goldman and others are hiding behind."
Seen from a broader perspective, Cox said the suit raises questions about "the peril of too big to manage," just as recent government bailouts raised questions about the dangers of "too big to fail" banks and insurance companies.
"Why not have a fiduciary standard where you have to have cards turned up on the table when selling a product?" Cox asked.
If the court of public opinion factored into the case, it apparently would not be in Goldman's favor.
In a survey that Argyle Executive Forum released Wednesday, 55.2% of business leaders said they believe Goldman is guilty, 20.7% said it is not guilty and 24.1% said they were unsure.
Tamar Frankel, professor of law and Boston University Michaels faculty research scholar, said that if the courts do not create a law to make firms like Goldman more responsible, then investors need to take greater responsibility.
"There comes a point when the investors have to make a decision and exercise some pressure," she said. This means moving the focus away from the product and over to the sales representative. Investors, Frankel said, need to ask whether their broker is a registered investment adviser. If he or she is not, investors can find someone who is.
But Terry Savage, author and personal finance columnist, said that empowering investors to ask the right questions is not enough.
There should be more of an effort in Congress to write a law that at the very least creates a fiduciary standard, Savage said.
"It shouldn't be such a tough thing to pass," she said. "If you are trying to sell a product, you should disclose what's in the product and your interests in that product."
Savage said "there's never going to be a law to legislate against stupidity, greed and emotion." She said the point of legislation is not to wipe out all mistakes — that would be impossible, since markets by nature go to extremes and people will lose money. Instead, the point is to legislate the right to equal access over vital information so that investors can make their own decisions, good or bad.
Savage said there is an even greater urgency to have a fiduciary standard, because so many Americans have been exposed to the markets through the financial services world telling them they need to invest for their retirement futures. "But people are saying the game is rigged and Wall Street is dealing us from the bottom of the deck and giving their friends the best cards," Savage said.