MARCY GORDON | 04/29/10
WASHINGTON — The U.S. attorney’s office in Manhattan is conducting a criminal investigation of Goldman Sachs over mortgage securities deals the big Wall Street firm arranged, a knowledgeable person said Thursday.
The person said the probe stems from a criminal referral by the Securities and Exchange Commission. The source spoke on condition of anonymity because the inquiry is in a preliminary phase. The SEC earlier this month filed civil fraud charges against Goldman and a trader in connection with the transactions, alleging it misled investors by failing to tell them the subprime mortgage securities had been chosen with help from a Goldman hedge fund client that was betting the investments would fail. Goldman has denied the charges and said it will contest them in court.
News of the action came a day after a group of 62 House lawmakers, including Judiciary Committee Chairman John Conyers, D-Mich., asked Justice to conduct a criminal probe of Goldman.
SEC spokesman John Nester wouldn’t confirm or deny that the agency had made a referral to the Justice Department for a criminal investigation. He declined any comment on the matter, as did Yusill Scribner, a spokeswoman for the U.S. attorney’s office in Manhattan.
Goldman spokesman Lucas van Praag said, “Given the recent focus on the firm, we’re not surprised by the report of an inquiry. We would cooperate fully with any request for information.”
The Wall Street Journal first reported the Justice Department action.
The Justice Department move was the latest in a dramatic series of turns in the Goldman saga, which has pitted the culture of Wall Street against angry lawmakers in an election year, in the wake of the financial crisis that plunged the country into the most severe recession since the Great Depression of the 1930s.
Also on Thursday, following days of failed test votes, the Senate lurched into action on sweeping legislation backed by the Obama administration that would clamp down on Wall Street and the sort of high-risk investments that nearly brought down the economy in 2008.
And two days earlier, a daylong showdown before a Senate investigative panel put Goldman’s defense of its conduct in the run-up to the financial crisis on display before indignant lawmakers and a national audience. The panel, which investigated Goldman’s activities for 18 months, alleges that the Wall Street powerhouse bet against its clients – and the housing market – by taking short positions on mortgage securities and failed to tell them that the securities it was selling were at very high risk of default.
Goldman CEO Lloyd Blankfein testily told the investigative subcommittee that clients who bought the subprime mortgage securities from the firm in 2006 and 2007 came looking for risk “and that’s what they got.”
In addition to the $2 billion so-called collateralized debt obligation that is the focus of the SEC’s charges against Goldman, the subcommittee analyzed five other such transactions, totaling around $4.5 billion. All told, they formed a “Goldman Sachs conveyor belt,” the panel said, that dumped toxic mortgage securities into the bloodstream of the financial system.
It wasn’t immediately known whether the Justice Department’s inquiry also encompasses those transactions.
The investigation, even though at a preliminary stage, opens a weighty new front in the legal aftermath of the near-meltdown of the financial system.
The Justice Department and the SEC have previously launched wide-ranging investigations of companies across the financial services industry. But a year after the crisis struck, charges haven’t yet come in most of the probes. In addition to fallen mortgage lender Countrywide Financial Corp. and bailed-out insurance giant American International Group Inc., the investigations also have targeted government-owned mortgage lenders Fannie Mae and Freddie Mac and crisis casualty Lehman Brothers.
The swift acquittal last November of two Bear Stearns executives in the government’s criminal case tied to the financial meltdown showed how tough it can be to prove that investment bank executives committed fraud by lying to investors.
The government must show that executives were actually committing fraud and not simply doing their best to manage the worst financial crisis in decades, some legal experts say.
The SEC civil case against Goldman also could be difficult, in the view of some experts.
Political intrigue has surrounded the SEC suit, meanwhile, as some Republicans have accused the agency of timing the April 16 announcement of fraud charges against Goldman to bolster prospects for the financial overhaul legislation while it was at a critical stage in the Senate.
The speculation was heightened by the revelation that the SEC commissioners approved filing of the charges on a 3-2 vote, along party lines, with both Republicans opposing the move.
SEC Chairman Mary Schapiro has insisted there was no connection between the timing of the agency lawsuit, which followed a monthslong investigation of the firm, and the push for the legislation in the Senate. Last week, President Barack Obama denied any White House involvement in the timing of the SEC case.
“We don’t time our enforcement actions by the legislative calendar or by anybody else’s wishes,” Schapiro told a Senate Appropriations subcommittee on Wednesday. “We bring our cases when we have the law and the facts we believe support bringing our cases.”
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