WASHINGTON — Sen. Arlen Specter said Thursday that he'd hold a hearing next month to examine Wall Street firms' potential conflicts of interest when they secretly bet against products similar to those they sold, and into whether investment banks were being penalized too lightly for their roles in wrecking the economy.
Specter's announcement opened a new front for Goldman Sachs and other banks that already are facing scrutiny from the Securities and Exchange Commission, the Senate Permanent Subcommittee on Investigations and House of Representatives oversight panels.
"In my judgment, Congress should examine these complicated transactions with a microscope and make a public policy determination as to whether such conduct crosses the criminal line," the veteran Pennsylvania Republican-turned-Democrat, who's facing a tough re-election race, said in a Senate floor speech.
Contending that major companies consider fines "a cost of doing business," the former Philadelphia district attorney said: "I have long been concerned about the acceptance of fines instead of jail sentences in egregious cases."
Last November, McClatchy reported that Goldman sold more than $40 billion in risky mortgage securities to institutional investors in 2006 and 2007 while secretly betting that the U.S. housing market would sink and depress the value of the securities.
Specter said he'd convene a hearing May 4 before a Senate Judiciary Committee subcommittee to explore the assertions by Goldman and other such banks that sophisticated investors such as pension funds and insurance companies "have a duty to protect themselves without relying on the investment counselor."
Last week, the SEC filed a civil fraud suit accusing Goldman and one of its vice presidents of setting up an offshore deal in which a longtime client, the hedge fund Paulson & Co., helped select and then bet against the securities in the deal without telling investors of Paulson's role.
Paulson made $1 billion in profits while the investors — a German bank and a fund that was backed by the Royal Bank of Scotland — lost that much.
The suit, Specter said, "has brought intense public concern to conduct on Wall Street which has long been questioned."
He said he wanted to explore the structures of complex Wall Street transactions, the circumstances under which investment bankers had a legal duty to the investors and "where, if at all, do conflicts of interest arise."
Specter said he also wanted to define investment counselors' duty to provide suitable investments to clients and whether their recommendations amounted to implicit representations that an investment was a wise one.
Congress should define these relationships, he said, "and what conduct is sufficiently anti-social to warrant criminal liability and a jail sentence."
Specter said he complained to the Justice Department that prison sentences weren't imposed in three cases:
- A Sept. 2, 2009, settlement in which drug maker Pfizer agreed to pay $2.3 billion to resolve criminal and civil liability for health care fraud stemming from its sale of the anti-inflammatory drug Bextra, although the Food and Drug Administration had found the drug unsafe.
- Guilty pleas entered by Siemens AG on Dec. 15, 2008, with an agreement to pay $1.6 billion in penalties for violations of the Foreign Corrupt Practices Act.
- A May 8, 2007, agreement by Purdue Pharma and three of its employees to pay $19.5 million to 26 states and the District of Columbia to settle complaints that Purdue violated an FDA ruling and encouraged doctors to prescribe excessive doses of the painkiller OxyContin, resulting in numerous deaths.
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