Goldman Sachs - PR Catastrophe Coming (Forget Smith)
Jane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Thanks to “Mr. X,” the Goldman Sachs (NYSE: GS) insider who tipped off the Galleon Hedge fund in “U.S. v. Gupta," the Greg Smith crisis will seem like small potatoes. The disgruntled former employee contended in an op-ed in The New York Times that Goldman Sachs didn’t care about customers. But that sort of thing can blow over if the firm makes enough money for its customers. And maybe it will. Believe me, something more serious is blowing in the wind.
A downright public relations catastrophe can happen in the next few months. That could be put in play by the aggressive, creative, and media savvy legal team for former Goldman Sachs director Rajat Gupta, accused of insider trading. The team, headed by Gary Naftalis, could leverage the story of the Goldman Sachs insider who gave confidential information about Intel Corp (NASDAQ: INTC) and Apple (NASDAQ: AAPL) to former Galleon head Raj Rajaratnam. If those lawyers are as shrewd as they seem they can use Mr. X as a platform to present possible scenarios. In the media, they could explain how such a person right inside Goldman Sachs could have influenced the stock price of Intel, Apple, and maybe more. Already the team is contending that the prosecution has the wrong guy, that is, Gupta. The actual miscreant is Mr. X. Take that a step further. It could be argued that Mr. X is the known leaker. What about all the possible leakers who aren't known, at least not yet.
The edge Gupta's legal team has could be strengthened if they get permission from presiding U.S. District Judge Jed Rakoff to allow the information about Mr. X. to be presented before the jury in “U.S. v. Gupta.” The media will have a feeding frenzy. That will include endless speculation how the jurors might be processing the data. Will they already be overwhelmed by the complexity of how trading decisions are made that they cannot factor in the role insider information could have in how the actual money had been made? How the media covered all that in the Raj Rajaratnam trial, which ended in conviction, will be multiplied exponentially because this defendant is classy, had been a brilliant authority of management, and remains an enigma.
It doesn’t take a media expert to anticipate that the attention would be deflected from Gupta to the inner workings of Goldman Sachs. Yes, Goldman Sachs would be on trial, at least in the court of public opinion. Hey, can’t you control your people? That will be what dominates the thinking of stakeholders who matter. Smith’s op-ed would reinforce that contention. Yeah, and why couldn’t you control Smith with the right organizational culture? Would this sort of thing happen at Jamie Dimon's JPMorgan Chase (NYSE: JPM)? Other financial institutions, ranging from Bank of America (NYSE: BAC) to Citigroup (NYSE: C), have the opportunity to present themselves as more disciplined than Goldman Sachs.
When the Gupta trial starts on May 21, it’s highly likely that Goldman Sachs’s chief executive officer Lloyd Blankfein will be called to testify. He was deposed on February 24. Every one of his words, facial gestures, and bits and pieces of body language could be positioned to prove out whatever the media and the firm’s enemies want them to stand for.
This is not hyperbole. Law and public opinion intersect. Law doesn’t operate in isolation. For example, the states are bearing witness to changes in the law about marriage between those of the same sex. That's because public attitudes about the issue have changed. For that reason, legal matters are often argued in the court of public opinion before, during, and after they are argued in the court of law. That can put the spotlight and keep the spotlight for a long time on those involved in the case. Now Blankfein has gone from having a secondary role to becoming a major character. It’s difficult to expect Goldman Sachs to come out of this in good shape. The defense team might see to that. It could serve their client well.
Jane Genova does not own stock in any company discussed. She frequently writes on the intesection of law and business.
