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Securities fraud, Goldman Sachs and critical criminology USA

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I am stunned that people are not more upset about this. You know, $8.7 billion of our money has gone missing in Iraq.   I didn’t even know they had a Goldman Sachs over there. (Jay Leno) [i]

In April of 2010, the Securities and Exchange Commission filed a civil fraud complaint against Goldman Sachs and Company, and its employee, one Fabrice Tourre.[ii]  In the words of one knowledgeable observer, this was the SEC’s “only major case against Wall Street since the crisis” (Sorkin 2010: 550). The complaint accused the defendants of making misleading and deceptive statements with respect to a debt instrument marketed by Goldman Sachs in 2007 that was based on subprime residential mortgage-backed securities.[iii]  Undisclosed to investors was that a hedge fund called Paulson & Company was involved in the selection of assets which formed the basis for the new debt instrument, and paid Goldman Sachs a fee of $15 million to market the new instrument. Paulson thereupon took a short position against the very security it helped to market – a position which Goldman Sachs did not disclose to investors as required under the Security and Exchange Commission Acts of 1933 and 1934.

In this instance, a “short” position would be an option, essentially, to bet that the debt instrument in question would lose value. Indeed, it was Goldman Sachs that helped Paulson & Company purchase that “short” position against the very same debt instrument it was marketing bullishly. To the extent that sub-prime debt securities failed in the market, Paulson & Company, Inc., stood to profit through their short position against those securities.  “GS & Co did not disclose Paulson’s adverse economic interests or its role in the portfolio selection process in the term sheet, flip book, offering memorandum or other marketing materials provided to investors.”[iv]

Indeed, fraud is alleged against employee Fabrice Tourre, who told investors that Paulson & Company has purchased $200 million worth of this new debt instrument when in fact, that was contrary to the record.   The SEC alleges that investors actually lost over $1 billion dollars, and that Paulson’s short option on the credit instrument netted a profit of over $1 billion dollars. The complaint actually quotes a Paulson employee to the effect:

It is true that the market is not pricing the subprime RMBS wipeout scenario. In my opinion, this situation is due to the fact that rating agencies, CDO managers and underwriters have all the incentives to keep the game going, while “real money” investors have neither the analytical tools nor the institutional framework to take action before the losses that one could anticipate based [on] the `news’ available everywhere are actually realized.


Because this is a civil fraud action, the SEC sought an injunction, disgorgement of profits, and sanctions in terms of interest and civil monetary penalties.

E-mail traffic indicates that Tourre and others were well aware of the subprime crisis as early as January 2007, quoting Tourre to the effect: “The whole building is about to collapse anytime now…”[v]  

On July 20, 2010, Federal Judge Barbara Jones signed a consent order in which Goldman Sachs and Company, without admitting all the allegations in the complaint, agreed to be enjoined from prohibiting any further violations of the Securities Act of 1933.[vi] It also agreed to pay a disgorgement amount of $15 million and a civil penalty of $535 million. The Company further admitted that its marketing materials for the debt instrument “contained incomplete information. In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was `selected by’ ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson’s economic interests were adverse to CDO investors.”[vii].

The Consent agreement also makes a variety of changes to the process in which Goldman Sachs & Company shall vet any future CDO’s, requiring that all future marketing materials be examined by the company’s own lawyers and outside counsel. Further, Goldman Sachs & Company agreed to have their mortgage department staff be subject to further training, particularly the requirements of disclosure under federal securities laws. The agreement does not bar the Government from launching criminal proceedings, albeit that eventuality is unlikely given the nature of the proof in a criminal proceeding (beyond a reasonable doubt) versus mere preponderance of the evidence in civil fraud matters. Finally, employees of Goldman Sachs must make themselves available for interview by Commission staff, to produce documents as requested, and to testify in legal proceedings when requested by the SEC.

For his part, Mr. Tourre has denied the allegations and appears headed for trial at this juncture.[viii] Indeed, his attorneys have already filed several motions to have the civil fraud complaint dismissed, in part, because the SEC has failed to allege any fraudulent activity occurring in the United States.[ix] His former employer will obviously be a witness against him. In fact, the SEC was forced to amend its original complaint and Mr. Tourre’s lawyers have since filed numerous pretrial motions in this civil matter.

Sutherland (1949, 1983) clearly anticipated this type of corporate crime pattern when he wrote his famous text White Collar Crime. Without delving into political economy, Sutherland pointed out how corporate criminals manage to insulate employees and directors from criminal prosecution, and convert the entire process into a civil or regulatory matter which can be resolved with a fine. Indeed, a journalist for the Rolling Stone magazine has observed that not one bank manager or financial kingpin embroiled in the 2008 financial meltdown over misleading and fraudulent debt has gone to jail (Taibbi 2011). Critical criminology enhances this interpretation by suggesting that this process is part of a state-corporate structure through which a private market economy is mediated, and puts the explanatory framework clearly within the confines of political economy (Tombs and Whyte 2003). Criminologist Gregg Barak (2012a, 2012b) has talked about this very issue in Crime Talk. Indeed, the sage of Omaha, Mr. Warren Buffett, seems to agree. It is important to note that Buffett’s Berkshire Hathaway Incorporated held a $5 billion stake in Goldman Sachs.   Here is Mr. Buffett’s version:

For the life of me, I don’t see whether it makes any difference whether it was John Paulson on the other side of the deal, or whether it was Goldman Sachs on the other side of the deal….It’s very strange to say, at the end of the transaction, that if the other guy is smarter than you, that you have been defrauded. It seems to me that that’s what they are saying. (Sorkin 2010: 552)


A note on publishing critical criminology in the USA, or not

This short article of mine was written last year, and then submitted to the official newsletter of the American Society of Criminology (ASC) called The Criminologist.  The intent was to interest members of the ASC in this particular prosecution, and to provide some interpretation (admittedly brief) from critical criminology. The response that followed serves to define the boundaries of what is considered “acceptable” criminology, at least from the point-of-view of mainstream criminology. This also occurred at the time when I was trying to get the ASC’s main journal, Criminology, interested in publishing an article of mine on Bernie Madoff. The Madoff article was a detailed review of the court record followed by a theoretical analysis that drew heavily from contemporary economics and neo-Marxist positions.

I contacted the editor of the ASC newsletter, as she then was, Prof. Cheryl Maxon, currently at the School of Social Ecology at the University of California at Irvine. She teaches in the Department of Criminology, Law and Society.   It is important to note that she is a former graduate student of Malcolm Klein and works in the area of street gangs, juvenile delinquency, and policing.   She was also the chair of the publications committee for the ASC.   Upon receipt of my short piece on Goldman Sachs, Professor Maxon, replied as follows:[x]

I don’t think there’s any restriction for critical criminologists! And I don’t send these out for review, it’s more of a question whether it’s appropriate for the newsletter or not. It is certainly well-written. So, I’m seeking advice from others….  

 After this review, which took only one week, Prof. Maxon declined to publish an article which was specifically written for a newsletter, and on a topic of substantive interest to many criminologists. Her rationale was as follows. Pay particular attention to how a state criminologist couches the rejection:[xi]

I have decided that the essay is not appropriate in its current form.The last paragraph is the starting place for an article that I think would be of great interest to the Criminologist’s readership. If you could take the descriptive material and analyze it through the lens of critical criminology, I would be pleased to consider the revised ms for publication.

Shortly thereafter, I replied to Prof. Maxon that I had no clue what she meant. I indicated that the piece had to be short due to space limitations in a newsletter format and further commented that it started with the data rather than theory for obvious reasons. I indicated that “I have no clue how to re-write this piece. If you wish to give me a more specific outline, maybe that would help(?)”.

How a short piece that is already well-written (her admission) can be better written is unclear. In the meantime, I will assume this is simply “getting the usual treatment.” Remember, mainstream publications like Criminology and The Criminologist have historically excluded critical criminologists. Business continues as usual (Quinney 1974).[xii]

No response was ever received, and it is now clear that none was to be forthcoming. The matter would likely have been subject to continuous editing – hoping that the author would simply get discouraged and move on to greener pastures (i.e., stay within your `own’ publications).

Indeed, the feature article on Bernie Madoff was rejected by the editor of Criminology, Wayne Osgood of Pennsylvania State University, as too journalistic a treatment of the subject. “[M]y stated reason…was based on the form of his article as primarily a lengthy sequential narrative about this case, with lots of detail not related to the criminological issues.”[xiii]   He refused to even send it out for review and initially had his graduate student reject it. Subsequently, he apologized for this error but still claimed that it was his decision erroneously put forth over the signature of a student.   When I appealed this matter to the ASC publications committee, I received the following response:[xiv]

In rejecting your individual manuscript, the Editor of Criminology is making no editorial policy decision.The Editor utilized his prerogative as the Editor after reviewing your manuscript, and made a decision. Each of the points you raised regarding the Editor’s actions and decisions are well within the scope and duties of the Editor, and do not represent a new editorial policy. Consequently, we have determined that there is no role for the Publication Committee in this matter.

So, there really was no meaningful right of appeal. The two rejections are clearly linked, originating as they do from critical criminology.

Research in criminology has a long history of being structured by various corporate and state interests. Gouldner (1973: xiv) noted in his oft-quoted introduction to The New Criminology that a critical perspective was needed to counter the widespread tendency for a researcher to become "the technician of the 'welfare' state and its zoo-keepers of deviance". Earlier, Gouldner (1969: 497–8) had reflected on the state of sociology by identifying the ‘inevitable tendency for any social system to curtail the sociologist’s autonomy in at least two ways: to transform him either into an ideologue for the status quo and an apologist for its policies; or into a technician acting instrumentally on behalf of its interests’.

Various commentators have supported Gouldner’s thesis. Gordon Hughes (2000) and others have noted that most of our research is directed at the powerless (i.e.convicts) and not at the systems of elite power which manage these members of the underclass Indeed, Hughes (2000: 241) pointedly suggests that it "is also highly probable that researchers are 'checked out' by information-gathering institutions such as the police in terms of their previous work and ideological leaning".

More recently, Reece Walters (2003) has provided us with a framework for looking at the state and its efforts to exercise control over criminological research. Here, the production of criminological knowledge is a ‘site of contestation and conflict’ (Walters 2003: 3). So-called deviant knowledge, sometime known as radical or critical criminology, is policed, surveilled, and often censored. He asks, ‘Why are certain forms of knowledge upheld as sophisticated, relevant, and useful and others marginalized, neutralized, dismissed and disregarded[?]’ (p. 6). The answer, Walters suggests, include several modes of governance.

Some of these ‘political’ processes include the politics of winning contracts and grants; restricted and proceduralized access to information; negotiating or bargaining for independence; the use of contracts to legalize control and restrict academic freedom; censorship of written work; failure to publicly release research findings, and so on. (p. 10)


Let us now return to the purpose of this article. Ostensibly, it is about analyzing a major example of corporate crime in the financial sector of the economy with a defendant, Goldman Sachs and Company, that clearly represents the pinnacle of the private capital market system in the world. That analysis, brief as it was, suggested that the source and motivation to commit securities fraud originated within the basic structure of the free market system.   It was not about evil, secretive pathological individuals who are socially disorganized – sometimes referred to as the “bad apple” thesis. These persons are socialized to be greedy, of course, but that feature is a characteristic of the marketplace.  

The second part of the article was devoted to the question of how critical criminology is managed within the “criminological establishment,” if we can invoke such terminology. It is not just the state and the corporate structure which suppress research into corporate deviance, but those who dominate the “criminological establishment” and who practice, for want of a better phrase, various modes of state criminology.  

Within the general rubric of criminology, “critical” criminology has emerged in the last four decades. This standpoint even has its own journal, Critical Criminology: An International Journal, and its own newsletter, The Critical Criminologist. Notwithstanding a significant interest in critical perspectives, this standpoint remains historically marginalized within mainstream criminology by state agencies and various foundations. Within academia, the dominant trend is to move to a “criminal justice” (administration or managerial) format. Critical criminologists can be found in niches, usually in sociology departments, where one scholar may be critical alongside a mainstream, dominant faculty. There are exceptions, but this is the general trend. 

Even within critical criminology itself, there are factions. Marxist criminology is rare, political economy not dominant, and various forms of cultural, feminist and post-modernist criminology the preferred approaches. Those of us who are old “materialists” and “political economy” types are dinosaurs, so to speak.  Don’t get me wrong.  There is some very interesting work being done in cultural and feminist circles, albeit some of it actually dates back to the ethnographic work of the Chicago School of Sociology.

Nevertheless, once you get a reputation as a critical criminologist or Marxist scholar, it is nearly impossible to get funding and access to data,such as convicts in prison, is closed down tightly. And if you try to publish in a mainstream journal or newsletter, the answer is provided above.    

The quest of critical criminology is very clearly to challenge this exercise of hegemonic power and to understand what that power seeks to protect.

[i]                New York Times, August 8, 2010, p. WK2.

[ii]               SEC v. Goldman Sachs & Co.,, 10 CV 3229, U.S. District Court for the Southern District of New York, filed April 16, 2010, Docket #1.

[iii]              The proper term for this investment is a collateralized debt obligation, or CDO.

[iv]              Ibid., p.2.

[v]               Complaint, ibid., p.18.

[vi]              SEC v. Goldman Sachs & Co., Consent Judgment of Defendant Goldman Sachs & Co., filed July 20, 2010, Docket Entry #25.  

[vii]             Ibid., p.2 of Consent Agreement.

[viii]             SEC v. Goldman Sachs & Co., Answer of Defendant Fabrice Tourre, filed July 19, 2010, Docket Entry#24.

[ix]              SEC v. Goldman Sachs & Co., Motion of Defendant Fabrice Tourre, filed Sept. 29, 2010, Docket Entry# 31. Renewed Motion to Dismiss, Docket Entry #51, filed December 9, 2010. Order as to international depositions, filed as Docket Entry #147, filed June 27, 2012, extending time for foreign discovery.  

[x]               E-mail dated January 1, 2011, from Dr. Cheryl Maxon, to the author.

[xi]              E-mail dated January 7, 2011, from Dr. Cheryl Maxon, to the author.

[xii]             My E-mail of January 9, 2011 to Prof. Cheryl Maxson.

[xiii]             E-mail of Prof. D. Wayne Osgood (Penn State) to author, dated January 5, 2011

[xiv]            E-mail dated January 7, 2011 from Cheryl Maxson to the author


Barak, Gregg (2012a) “Financially Respectable Crimes of Wall Street”, CrimeTalk, downloaded from (March 20, 2012).

Barak, Gregg (2012b) “Wall Street Crimes II: Dodd-Frank and the Limits of Regulatory Reform”, CrimeTalk, downloaded from (May 7, 2012).

Gouldner, A.W. (1969). The Coming Crisis in Western Sociology. London: Heinemann.

Gouldner, A.W. (1973). Foreword. In I. Taylor, P. Walton, & J. Young (Eds.), The New Criminology. London: Routledge & Kegan Paul.

Hughes, G. (2000). Understanding the politics of criminological research. In Jupp, Davies, & Francis (Eds.), Doing Criminological Research (London: Sage. pp. 234–48).

Lee, R.M. (1993). Doing Research on Sensitive Topics. London: Sage.

Quinney, Richard (1974)  Critique of Legal Order (Boston: Little, Brown).

Sorkin, Andrew Ross (2010) Too Big to Fail (New York: Penguin Books).  

Sutherland, Edwin H. (1949) White Collar Crime (New York: Dryden Press).

Sutherland, Edwin H. (1983) White Collar Crime: The Uncut Version. Introduction by Gilbert Geis and Colin Goff (New Haven: Yale University Press).

Story, Louise and Sewell Chan (2010) “Goldman Cited `Serious’ Profit on Mortgages” New York Times 25 April 2010, pp. 1, 25.

Taibbi, Matt (2011) “How Wall Street’s Crooks Evaded Jail.” Rolling Stone , Issue 1125 (March 3, 2011): 44-51.

Tombs, Steve and Dave Whyte (2003) [eds.] Unmasking the Crimes of the Powerful (New York: Peter Lang publishers).

Walters, R. (2003). Deviant Knowledge: Criminology, Politics and Policy. Cullompton, Devon, UK: Willan Publishing.

Matthew G. Yeager is a criminologist and associate professor of sociology at King’s University College, University of Western Ontario, London, Canada (B.A. Criminology, U.C. Berkeley, 1972; M.A. Criminal Justice, State University of New York, Albany, 1975; Ph.D., Sociology, Carleton University, Ottawa, Ontario, Canada, 2006). He works in the fields of sociology of law, sentencing, inequality, dangerous offenders, critical criminology and political economy.   E-mail: This email address is being protected from spambots. You need JavaScript enabled to view it. .


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