Report: Goldman Sachs facing criminal probe

Prosecutors in New York are looking into whether the financial giant knowingly committed fraud in some of its mortgage deals, The Wall Street Journal says. But the probe is young and could end with no charges filed.

By Charley Blaine Apr 29, 2010 8:29PM

Updated: 4:52 p.m. ET Friday


Goldman Sachs' Lloyd Blankfein © AP Photo/Susan WalshAs if Goldman Sachs (GS) and CEO Lloyd Blankfein don't have enough to think about. Now the Wall Street powerhouse has to worry about a federal criminal investigation.

The Wall Street Journal said late Thursday that federal prosecutors were probing whether Goldman Sachs and any of its employees committed securities fraud in connection with its mortgage trading.

Sources told the Journal the investigation from the Manhattan U.S. Attorney's Office is at a preliminary stage. It stemmed from a referral from the Securities and Exchange Commission.

The SEC recently filed civil securities-fraud charges against Goldman Sachs and Fabrice Tourre, formerly a trader in its mortgage group. Goldman and Tourre deny they've done anything wrong and are fighting the charges.

There is no guarantee that the probe will result in any charges being filed. In fact, the Journal said, prosecutors haven't determined whether they will bring charges in the case.

The criminal probe, however, raises the stakes for Goldman, Wall Street's most powerful firm.

The investigation is centered on different evidence than the SEC's civil case, the Journal's sources said.  The Journal couldn't determine which Goldman deals are being scrutinized in the investigation.

A spokesman for the Manhattan U.S. Attorney's office declined to comment. Goldman declined comment. Goldman Sachs

Goldman Sachs shares were down 9.4% on Friday to $145.20; they had traded as low as $144.44.


The sell-off was due in part to downgrades of the stock by Standard & Poor's. S&P analysts dropped their rating on Goldman to "sell" from "hold" and trimmed their price target to $140 from $180.


"Though traditionally difficult to prove," S&P's analysts wrote, "we think the risk of a formal securities fraud charge, on top of the SEC fraud charge and pending legislation to reshape the financial industry, further muddies Goldman's outlook."


Bank of America downgraded the stock from "buy" to "neutral," also citing the probe.


The stock is down 14% in April and 13% on the year.
The shares fell nearly 61% during the 2008 crash and rebounded 100% in 2009.

The latest development comes amid public calls for more Wall Street accountability for the industry's role in the financial crisis that very nearly caused a complete meltdown of the U.S. financial system.

Though there are multiple ongoing criminal and civil investigations, no Wall Street executives connected with the crash of 2007-08 have been convicted of criminal charges.

During congressional hearings this week into Goldman's role in the crisis, legislators grilled Blankfein and other Goldman executives for nearly 11 hours.

The SEC and the Justice Department often coordinate their actions on investigations, the Journal noted.

The probe underscores efforts by the U.S. Attorney's Office in Manhattan to prosecute white-collar and Wall Street crime.

The office is pursuing the largest insider-trading case in a generation, charging 21 individuals and negotiating 11 guilty pleas in that case.

But the Goldman probe presents a significant challenge for the government. Last year, prosecutors lost a high-profile fraud case against two former Bear Stearns executives, in the first major criminal case linked to the financial meltdown.

To bring any criminal charges in the Goldman matter, prosecutors would need to believe they had gathered evidence that showed that the firm or its employees knowingly committed fraud in their mortgage business. That will probably be the toughest hurdle.

Meanwhile, financial cases can be highly complex and require highly sophisticated financial expertise that's hard to find. Few outside of Wall Street understand arcane products such as collateralized debt obligations, the pools of mortgage-related holdings at the heart of the SEC civil case against Goldman, the Journal noted.

On April 16, the SEC charged Goldman and Tourre with securities fraud in a civil suit relating to a mortgage transaction known as Abacus 2007-AC1, a deal the government said was designed to fail.

The SEC alleged that Goldman duped its clients by failing to disclose that hedge fund Paulson & Co. not only helped select the mortgages included in the deal but also bet against the transaction. 

Though the SEC's case is subject to a lesser standard of proof than a criminal case, proving it will still be a challenge.  The SEC's commissioners were split 3-2 along party lines on whether the agency should bring a case.

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