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Hornberger's Blog is a daily libertarian blog written by Jacob G. Hornberger, founder and president of FFF.
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Goldman Sachs and Federal Fraud


Commentators are debating whether the Justice Department will be able to prove its civil fraud case against Goldman Sachs. Unfortunately, they’re missing the point. The Justice Department didn’t bring its suit with the aim of proving that the company committed fraud. It brought its suit to get a massive amount of money for the federal government in a pretrial settlement of the case.

Here’s how the racket works. The government knows that its litigation will cost Goldman Sachs millions of dollars in litigation costs, including attorney’s fees, deposition expenses, bad public relations, and loss of revenues. So, the government calculates that the company will be willing to settle for a large amount of money to save itself from all that aggravation. The government accepts the settlement. The Justice Department lawyers celebrate that they’ve “won” the case. Federal officials, ever more desperate for more revenues to pay for their out-of-control spending, are exultant over the “free” monies that have been deposited into the government’s coffers.

Many years ago, I was a young lawyer practicing law in my hometown of Laredo, Texas. One of my clients was the owner of a local trucking company. One day, he got served with a notice from the State of Texas assessing him with an enormous fine. The fine, the notice stated, represented the amount of extra burden that my client’s trucking business was placing on the roads and highways of the state. The state was claiming that because the trucking industry used the state’s roads and highways more than other people, it was more responsible for their maintenance costs.

I told my client that the state’s claim was ridiculous. The state collects gasoline taxes to cover such maintenance costs. When trucking companies purchase gasoline, they’re paying what the legislative branch has determined to be an appropriate amount. I advised my client to fight the lawsuit in that it was nothing more than extortion.

But there was one big problem with my advice. I don’t recall the exact amount that the state was demanding, but let’s say it was $200,000, which would have been an extremely large sum for my client, a small trucking company. The problem was that the state was offering to settle its proposed lawsuit for, say, $25,000.

So, my client was in a quandary — whether to pay the $25,000 and get rid of the suit or fight the state on principle and possibly end up losing $200,000. My client chose to settle the suit. The state received a “free” $25,000, plus all the other settlement money that was being paid by other trucking companies that had received the same notice.

In the Goldman Sachs case, government regulations and regulators failed to prevent what they now claim is civil fraud. If economic regulations and government regulators can’t prevent such things from happening, especially in one of the largest financial companies in the world, then what good are they? Isn’t that the purported purpose of regulations and regulators?

The feds aren’t going after Goldman Sachs on criminal charges of fraud, which would fall within the ambit of proper governmental powers. Instead, they’re only going after the company on civil charges of fraud. They’re seeking money, not jail time.

What’s that all about? If investors have been defrauded, why can’t they sue for their damages? Why shouldn’t they, not the government, receive the money for damages they’ve allegedly suffered? What business does the government have suing for civil damages? It hasn’t suffered any injury.

It’s all about money. As the deficit becomes larger and larger, we can expect to see the federal government desperately looking for more ways to extract money from private businesses. Look at the record fine they just levied against Toyota — $16.4 million, an amount that Toyota has agreed to pay rather than incur expensive litigation. No doubt federal officials are celebrating this large amount of “free” money that will soon be deposited into their coffers. And don’t forget: all those automobile regulations and regulators failed to prevent the Toyota accelerator problems from occurring.

The real fraud is the whole idea of a regulated economy. When public officials assumed the power to regulate economic activity many decades ago, they expressly represented that it would protect people from bad things happening to them. That representation was false and fraudulent. Regulations and regulators don’t protect people. They simply lull people into thinking that the government is taking care of them. The regulated economy simply provides the government with another means of legally stealing or extorting money from the private sector to satisfy the ever-voracious financial needs of a bankrupt government.

This post was written by:

Jacob G. Hornberger is founder and president of The Future of Freedom Foundation. He was born and raised in Laredo, Texas, and received his B.A. in economics from Virginia Military Institute and his law degree from the University of Texas. He was a trial attorney for twelve years in Texas. He also was an adjunct professor at the University of Dallas, where he taught law and economics. In 1987, Mr. Hornberger left the practice of law to become director of programs at the Foundation for Economic Education. He has advanced freedom and free markets on talk-radio stations all across the country as well as on Fox News’ Neil Cavuto and Greta van Susteren shows and he appeared as a regular commentator on Judge Andrew Napolitano’s show Freedom Watch. View these interviews at LewRockwell.com and from Full Context. Send him email.