Taking on Wall Street
The behind-the-scenes tale of how two Brandeis graduates challenged financial powerhouse Goldman Sachs in a historic legal showdown.
by Gregory Zuckerman '88
Lorin Reisner ’83 and Kenneth Lench ’84 were about to take on perhaps the most important lawsuit in the history of the Securities and Exchange Commission.
It was April 2010, and Reisner, the deputy director of the SEC’s enforcement division in Washington, D.C., and Lench, head of a key unit in the division, were preparing a civil fraud suit against Wall Street powerhouse Goldman Sachs.
The Brandeis graduates had helped successfully convince the SEC’s five commissioners to vote for the suit, arguing that Goldman misled investors about complex securities at the heart of the mortgage meltdown. But opposition within the agency was so fierce that it led to a nonunanimous vote to pursue the suit.
Nervousness within the SEC was understandable. The agency, charged with policing the nation’s financial markets, had been excoriated for missing a series of scandals, including Bernard L. Madoff’s huge Ponzi scheme and an alleged multibillion-dollar fraud by R. Allen Stanford. The worst financial collapse since the Great Depression left many outraged at those who crafted mortgage-related products at the heart of the losses, as well as at the SEC and other regulators charged with acting as the markets’ watchdogs.
The situation had hurt morale within the agency; some were wary of further criticism on Wall Street and a backlash if the SEC picked a fight with Goldman Sachs, Wall Street’s dominant force, and lost. Reisner, an outgoing and upbeat presence at the agency who favors fashionable eyeglasses and Hermes ties, tried to rally his team. “Let’s not be afraid to do what’s right,” he told them.
The lawsuit was filed in April 2010, instantly grabbing front-page headlines around the globe. Reisner and Lench believed in the strength of their suit, but Goldman Sachs had a battalion of top lawyers at its disposal. The firm denied it had duped investors, and some legal experts were dubious of the SEC’s case. Some suggested the suit was politically motivated.
If the suit went awry, it would cripple the reputation of the beleaguered agency, Reisner and Lench knew, making the SEC less likely to pursue future tough cases. “We had been beaten about the ears for so long and criticized for being soft,” Lench recalls. “You can’t help but get a little demoralized when everyone is throwing bricks at you. This was a big deal. If we lost, it would be a huge embarrassment; we’d be the gang who couldn’t shoot straight.”
Failure also would threaten the reputations of Reisner and Lench, who had enjoyed successful careers that were deeply influenced by their time on the Brandeis campus in the early 1980s.
Reisner grew up in the New York suburb of Spring Valley, the child of popular teachers at the school he would attend, Ramapo High. Before landing at Brandeis in 1979, Reisner wasn’t a very serious student, he recalls. But he soon became focused on his studies, inspired by professors like Jeffrey Abramson, who taught constitutional law, and by Gordie Fellman’s and Steve Whitfield’s lectures on American political thought. Influenced by Brandeis’ climate of activism, Reisner became involved in politics on campus, running for and winning a seat on the student senate. When a favorite Spanish professor who had opened Reisner’s eyes to what he saw as faulty U.S. policy in Latin America was denied tenure, Reisner organized student opposition. The decision was upheld, he says, but the protest helped change the school’s process for granting tenure to include more student input and a greater emphasis on teaching.
During his sophomore year, when plans were announced for a paid speech by G. Gordon Liddy, the convicted ringleader of the Watergate break-in, Reisner organized a boycott. “He was a crook, a scoundrel,” Reisner recalls. “There seemed better ways to spend the money.”
Hundreds of students turned out to protest the speech, but it went ahead, nonetheless.
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As a senior, Reisner became one of two student representatives on the university search committee charged with selecting the next president. He flew around the country interviewing candidates, along with Brandeis trustees Jacob Hiatt, Paul Levenson ’52, Martin Peretz ’59 and Milton Katz; the group eventually settled on Evelyn Handler.
“It was an amazing experience being on a search committee with those lions who built Brandeis,” Reisner says. “I loved Brandeis, I’m a big fan — I arrived as a kid, immature and not particularly thoughtful. I left as a careful, critical thinker and a better person.”
Lench, a product of public schools in the Bronx and northern New Jersey, says he also had a “mediocre work ethic” before arriving on campus in 1980. But he quickly embraced the rigor of classes at Brandeis and matured by juggling a work-study program along with a heavy course load while pursuing various campus activities.
“I saw friends working very hard, and it was a competitive environment, and that spurred me,” says Lench, who was influenced by economics and politics classes, among others. “The range of courses and quality of the professors were outstanding, but I also had a blast and made good friends.”
Lench was an avid intramural athlete, playing on an undefeated flag football team, and he became involved in a number of hot-button issues on campus. After a series of attacks on women on campus, he helped establish a late-night van service for female students. The school’s active student body changed Lench, who volunteered for Alan Cranston’s presidential campaign in 1984.
After graduation in 1983, Reisner went to Harvard Law School; Lench enrolled at Boston University Law School in 1984.
It was only in law school that the two men met, during a regular pickup basketball game between Brandeis and Notre Dame graduates that was held near the Harvard campus.
After law school, Reisner clerked for Milton Pollack, a judicial luminary who served as U.S. district judge for the Southern District of New York. Pollack soon became a mentor to the young attorney. Reisner was enthusiastic about First Amendment and discrimination cases, and he relished the opportunity to work on some high-profile criminal cases. But the position also gave Reisner his first exposure to the financial world, and he helped work on a series of civil cases relating to insider trading against Wall Street arbitrageur Ivan Boesky and others.
Watching young assistant U.S. attorneys argue cases in front of the court, Reisner became clear on what he wanted to do with his own career. “I remember thinking, ‘That’s pretty exciting, that’s something I want to do,’” Reisner recalls. “It confirmed I wanted to be a litigator.”
After a postclerkship stint with the prominent New York law firm Debevoise & Plimpton, he accepted a job with the U.S. Attorney for the Southern District of New York in 1990.
“Brandeis reinforced my interest in public service, and the desire to do justice and be active in the community,” he says, explaining the pull of public service.
At the U.S. Attorney’s office, Reisner bonded with another hard-charging attorney, Robert Khuzami, who had joined the office the same week. They shared a single computer in Khuzami’s office with 12 other assistant U.S. attorneys.
Initially assigned to narcotics and firearms cases, Reisner graduated to corruption, bribery and organized crime. He tried a major murder-racketeering case involving a gang in the New York City borough of Queens, leading a four-month trial that resulted in convictions for the defendants and acclaim for the young attorney.
After four years in the office, Reisner was on top of his game. But he also was married, with a young daughter, and thought a private-sector stint would be best for his family. He returned to Debevoise, becoming a partner in 1996 and spending the next 13 years focused on business, intellectual property and First Amendment cases involving high-profile clients like The New York Times, The Washington Post and The Gap.
Public service continued to tug on him, however. “I really had a wonderful law practice, but I knew I wanted to return to public service again,” he remembers.
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Reisner remained close with Khuzami, who had become a high-profile federal prosecutor. (Khuzami even met his future wife at a dinner party at Reisner’s home.) When Khuzami was appointed the head of the SEC’s enforcement division in early 2009, as the nation struggled to recover from the financial crisis, Reisner jumped at Khuzami’s invitation to move to Washington, D.C., and help reinvigorate the agency.
At the SEC, Reisner reconnected with his old basketball teammate, Ken Lench, who had begun his own legal career doing corporate work at a firm in northern New Jersey. But his heart was elsewhere. “I learned about the business world, but I didn’t feel a sense of mission,” Lench recalls.
Lench had joined the SEC in 1990 and carved a successful career at the agency. In January 2010 — several months after Reisner’s arrival — Lench was appointed to head the SEC’s 45-person structured and new products unit, part of an effort by Khuzami and Reisner to establish specialized investigative teams to better combat financial crimes.
Within the SEC, many veterans questioned the wisdom of bringing in Khuzami and Reisner. They were outsiders — New York prosecutors who had never worked at the agency, the skeptics said. Some doubted their ideas for change. Lench, the veteran, urged patience.
As global financial markets quaked, Reisner and Lench regularly met for coffee, where they discussed their mutual desire to “hold wrongdoers accountable for unlawful conduct,” as Reisner puts it.
“We focus on leveling the playing field between the most powerful people in society and the less powerful,” Lench says. “You try to get the truth and follow where the evidence leads you — sometimes it leads to a great case, sometimes it doesn’t.”
Lench was confident the agency was regaining strength and its sense of mission. He had won several big cases related to the meltdown that brought recoveries to investors, including one that charged big banks Citigroup, Bank of America, UBS and others with misleading investors about the risks of certain exotic securities that saw their market suddenly freeze during the financial crisis.
Then came Goldman. By the summer of 2009, Reisner was convinced they were on to an important case. Within weeks of joining the agency, Reisner had been briefed on early evidence suggesting that Goldman had created an investment product linked to potentially risky subprime mortgages, or those granted to borrowers with less-than-stellar credit ratings.
What was unusual about this investment product was that Goldman had created it with input from one of its clients, Paulson & Co., a New York hedge fund. The product, called a collateralized debt obligation (CDO), was crafted to do well if a group of subprime mortgages held up in value; the CDO would fall in value if these mortgages dropped in price.
Goldman sold interests in the CDO to clients, including two foreign banks. But these banks were never told by Goldman that the Paulson team had helped to choose potentially risky mortgages for the CDO, thereby playing a role in creating it. Not only that, but Paulson also bet against the product, hoping to profit as it fell in price.
Months after Goldman sold the CDO investment, it collapsed in value, leading to sizable losses for the bank investors who bet on it, and $1 billion in profits for Paulson, which had wagered against it.
Together with other members of the investigative team, Lench and Reisner spent weeks reviewing transaction documents, interviewing witnesses and examining emails related to how Goldman sold the deal, called Abacus, to the investors. Reisner then helped staff members take depositions of key Goldman employees and clients.
His excitement built.
This is our chance to investigate whether unlawful conduct played a part in putting this country in a tough spot, Reisner recalls thinking.
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The SEC filed its suit in April. It was front-page news in The Wall Street Journal and The New York Times. Goldman’s attorneys said they were confident they could beat the lawsuit. Their defense: The firm was creating a product for its customers and didn’t have a legal obligation to tell clients all the details of how it was created. The investors were big boys who could decide for themselves if the investment was attractive, people close to Goldman said at the time.
The agency had warned Goldman it was stalling by not moving fast enough to provide documents and responses to the SEC. Reisner signaled an eagerness to lead a possible trial, an unusual step for such a senior SEC member, and one that illustrated the importance of the case to the agency.
While the outside world focused on the face-off between the government and the Wall Street powerhouse, Lench acknowledges today that he shared some concerns about the success of the case, even as he urged his team to push ahead. The complicated nature of the case might be hard to argue to a jury, he knew.
But he and Reisner also were privy to a secret that few on Wall Street were aware of. Within weeks of the suit, Goldman Sachs had reached out to the SEC to explore a possible settlement, according to a report issued recently by the SEC’s inspector general. It reassured them that the SEC had a strong case — and that Goldman knew it.
By July, three months after the lawsuit was filed, Goldman called, ready to cut a deal. The firm agreed to pay a $550 million penalty, one of the largest in Wall Street history. It also acknowledged mistakes made in crafting the deal, a rare admission.
Some critics said the penalty was too small, noting that it represented just 14 days of profits at Goldman in its most recently completed quarter. Others said it was too large and that Goldman might have fared well in a trial.
To Reisner and Lench, the settlement was a clear victory — a message to Wall Street about the need to provide truthful information to investors, and a signal that the SEC was newly prepared to take on challenging cases.
“Half-truths and deception cannot be tolerated” in the securities markets, Reisner told reporters at the time.
One former SEC enforcement attorney put the case in perspective. “The SEC used to be very reluctant to prosecute cases unless they were almost assured of victory; they were afraid of negative publicity and adverse legal precedent,” says fellow Brandeis alumnus Ronald Rubin ’83, who now is in private practice.
“The SEC has recently demonstrated a much greater willingness to take on difficult and complex litigation,” says Rubin. “That’s an aggressive approach that Rob Khuzami and Lorin have brought.”
In addition to the Goldman settlement, Reisner has helped direct a series of successful cases involving other well-known financial companies at the heart of the meltdown, including Countrywide Financial, New Century Financial, State Street, Morgan Keegan, Bank of America, JP Morgan, Citigroup and others.
And Reisner and Lench say more important cases are ahead for the agency.
“The Brandeis ethos of trying to have a positive impact on your community, and the motto of ‘truth even unto its innermost parts,’ are principles that really resonated with me,” says Reisner.
Gregory Zuckerman ’88 is a Wall Street Journal special writer and author of “The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History” (Random House/Broadway Business, Dec. 2010).