Regulatory Rub of the SEC vs. Goldman Sachs

May 18, 2010 4:28 PM ET
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Contributor Since 2009

Stephen A. Boyko is the Chairman and CEO of N2K Ecosystems, Inc. — a business development consultancy providing market-based solutions for entrepreneurial wealthfare. He has over forty years of financial services industry experience that include formulating regulatory policy for the National Association of Securities Dealers ("NASD"), managing regional brokerage operations for retail, institutional, and corporate clients, creating B3 metrics for economic development, and providing a practitioner's perspective for the privatization of the former Soviet Union in the areas of corporate governance and regulatory development of the Ukrainian Capital Market. Mr. Boyko holds a BA in history from Bates College and an MBA in finance from American University. He is conversant in French, Russian, and Ukrainian and serves on the Advisory Board of Yorktown University.


The SEC Enforcement Division has recommended that Goldman Sachs be sued. The agency argues that the firm “misled investors about highly complex securities.” If there is complexity, there is uncertainty. Achievement of the desired regulatory reform requires moving beyond risk management to randomness governance of both determinate and indeterminate underlying economic conditions.


Regulatory reforms are a lot like term papers.


     “C” papers provide an answer. In this case, the answer is the allegation that Goldman Sachs misled customers notwithstanding whether such customers were qualified or without specifying what capacity Goldman had acted etc..  


     “B” papers provide solution metrics that connect the factual dots as to whether the regulatory effort was directed at the product—limiting proprietary trading; or, the process—segmenting the underlying economic environment into predictable, probable, and uncertain regimes.


     “A” papers ask the correct foundational questions can regulators govern both risk and uncertainty with the legacy, one-size-fits-all deterministic regime?


Relevant to Goldman Sachs is the issue of "scienter," a legal term that refers to intent or knowledge of wrongdoing. This means that an offending party has knowledge of the "wrongness" of an act or event prior to committing it. As there are innate complexities in the capital markets, the element of “uncertainty” always will be a part of complex adaptive systems. But what and when can one know something is wrong in an uncertain underlying economic environment that is inherently “unknowable?” Furthermore, can deterministic metrics be used effectively and efficiently to govern indeterminate investments?


Much like the misdiagnosis of a medical condition, adding deterministic medicine to an indeterminate malady only causes the patient to become more ill. Similarly, conflating “risk” and “uncertainty” exacerbates capital market structural problems thus accelerating the troubling trend of larger and more frequent economic dislocations.


Stephen A. Boyko





Author of “We’re All Screwed: How Toxic Regulation Will Crush the Free Market System” and a series of articles on capital market governance.

Disclosure: Long RYURX

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