No slam dunk on Goldman charges
Source: Agencies |
April 19, 2010, Monday
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THE fraud charges against Goldman Sachs & Co that rocked financial markets last Friday are no slam dunk, as hazy evidence and strategic pitfalls could trip up government lawyers.
Yet that hardly matters, experts say, because the allegations will kick off new suits that could entangle Goldman and other banks for years to come.
The charges against Goldman relate to a complex investment tied to the performance of pools of risky mortgages. The United States Securities and Exchange Commission alleged that Goldman marketed the package to investors without disclosing a major conflict of interest: The pools were picked by another client, a prominent hedge fund that was betting the housing bubble would burst.
In a written response to the charges, Goldman said it had provided "extensive disclosure" to investors and that the largest investor had selected the portfolio - not the hedge fund client. The bank said it lost US$90 million on the deal.
That doesn't contradict the SEC complaint, which says the largest investor selected the mortgage investments from a list provided by the hedge fund. And the fact that Goldman lost money has no impact on the fraud charges.
The charges will unleash a torrent of lawsuits, and likely signal that the government is prepared to file more lawsuits related to the overheated market that preceded the financial crisis, experts said.
"This is just the tip of the iceberg," said James Hackney, a professor at Northeastern University School of Law. "There are a lot of folks out there in different deals who played similar roles, and once it starts building steam, plaintiffs' lawyers will figure out this is where the money is and there should be a lot of action."
Among the legal action expected in the coming months:
- Class-action suits by Goldman shareholders who believe Goldman's alleged misconduct made their stakes less valuable could come as early as today. Such suits are common when companies are accused of wrongdoing. Goldman shares fell almost 13 percent last Friday as the bank lost US$12.5 billion in market capitalization.
- Suits by investors who believe Goldman sold them deals that were doomed to fail. The investors in the deal at the heart of the SEC case could sue first, followed by others who believe their losses were similar.
- Possible criminal charges, if the SEC's civil case reveals evidence that meets the higher standard of "proof beyond a reasonable doubt." Experts said it's unlikely the company as a whole will face criminal charges, but evidence could emerge that would expose the Goldman executive named in the SEC complaint, Fabrice Tourre, to criminal prosecution.
- Charges by regulators about other mortgage investments at Goldman and elsewhere.
Already the case has provoked legal questions from foreign governments. British Prime Minister Gordon Brown yesterday said he wanted Britain's financial watchdog to investigate Goldman.
"We will work with the Securities and Exchange Commission in the United States," Brown said.
Yet that hardly matters, experts say, because the allegations will kick off new suits that could entangle Goldman and other banks for years to come.
The charges against Goldman relate to a complex investment tied to the performance of pools of risky mortgages. The United States Securities and Exchange Commission alleged that Goldman marketed the package to investors without disclosing a major conflict of interest: The pools were picked by another client, a prominent hedge fund that was betting the housing bubble would burst.
In a written response to the charges, Goldman said it had provided "extensive disclosure" to investors and that the largest investor had selected the portfolio - not the hedge fund client. The bank said it lost US$90 million on the deal.
That doesn't contradict the SEC complaint, which says the largest investor selected the mortgage investments from a list provided by the hedge fund. And the fact that Goldman lost money has no impact on the fraud charges.
The charges will unleash a torrent of lawsuits, and likely signal that the government is prepared to file more lawsuits related to the overheated market that preceded the financial crisis, experts said.
"This is just the tip of the iceberg," said James Hackney, a professor at Northeastern University School of Law. "There are a lot of folks out there in different deals who played similar roles, and once it starts building steam, plaintiffs' lawyers will figure out this is where the money is and there should be a lot of action."
Among the legal action expected in the coming months:
- Class-action suits by Goldman shareholders who believe Goldman's alleged misconduct made their stakes less valuable could come as early as today. Such suits are common when companies are accused of wrongdoing. Goldman shares fell almost 13 percent last Friday as the bank lost US$12.5 billion in market capitalization.
- Suits by investors who believe Goldman sold them deals that were doomed to fail. The investors in the deal at the heart of the SEC case could sue first, followed by others who believe their losses were similar.
- Possible criminal charges, if the SEC's civil case reveals evidence that meets the higher standard of "proof beyond a reasonable doubt." Experts said it's unlikely the company as a whole will face criminal charges, but evidence could emerge that would expose the Goldman executive named in the SEC complaint, Fabrice Tourre, to criminal prosecution.
- Charges by regulators about other mortgage investments at Goldman and elsewhere.
Already the case has provoked legal questions from foreign governments. British Prime Minister Gordon Brown yesterday said he wanted Britain's financial watchdog to investigate Goldman.
"We will work with the Securities and Exchange Commission in the United States," Brown said.
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