Financial Reform: Goldman Sachs Executives Testify before Congress

On Tuesday of this week several Goldman Sachs executives testified before the Permanent Senate Subcommittee on Investigations. Among those spending the day testifying were CEO Lloyd Blankfein and Fabrice (The Fabulous Fab) Tourre, who was named along with Goldman by the SEC in its securities fraud suit. The hearing picked up where the SEC suit left off as the Committee's staff focused the senators' attention more on conflicts of interest in its conduct than the SEC's specific fraud allegations. While the coverage of the hearing focused on assertions from senators with corresponding denials from Goldman personnel concerning whether Goldman had conflicts of interest, a broad view of the hearing highlights the fact that the senators and executives were not even in agreement about underlying duties and definitions.

Black's Law Dictionary defines a "conflict of interest" as a "[t]erm used in connection with . . . fiduciaries and their relationship to matters of private interest or gain to them." Thus, the concept of a "fiduciary" or "fiduciary duty" provides the basis to analyze a conflict of interest. Black's defines "fiduciary duty" as "[a] duty to act for someone else's benefit, while subordinating one's personal interests to that of the other person. . . ."

It is clear that the subcommittee and its staff assumed that Goldman had a fiduciary duty to its clients and then violated that duty by developing and selling bad investment deals and then engaging in financial transactions involving these deals that were adverse to the interests of the clients. What is far less clear is whether Goldman's executives believe that they have a fiduciary duty to Goldman's customers. If they do believe such a duty exists, Goldman's definition of a "fiduciary duty" must be significantly different from the one offered by Black's and intuitively adopted by the subcommittee.

Ultimately, apart from the speeches and political posturing, which is a part of any high profile legislative hearing, Tuesday's hearing was probably very important for the public as Congress moves forward with financial reform. A fundamental question that the reform package will address is the duty that financial professionals owe to their clients. The resulting law will attempt to define the parameters of the duty by the limits that it imposes on the financial industry. The likelihood is that the legislation will state clearly that Wall Street has a clear duty of care owed to clients and customers that must prevail over the banking institutionss goals of realizing profits. The final rules could range from outright bans on certain activities to allowing the banking institutions to hold adverse positions, but with full disclosure to their clients.