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US starts criminal probe into Goldman trading
Source: Agencies |
April 30, 2010, Friday
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US federal prosecutors are conducting a criminal probe into whether Goldman Sachs Group Inc or its employees committed securities fraud in connection with its mortgage trading, the Wall Street Journal reported on its website yesterday.
The investigation from the Manhattan US Attorney's Office, which is at a preliminary stage, stemmed from a referral from the US Securities and Exchange Commission, the WSJ said, citing people familiar with the probe.
The SEC already has filed a civil fraud lawsuit against Goldman, the world's most powerful investment bank, charging that it hid vital information from investors about a mortgage-related security.
"Given the recent focus on the firm, we are not surprised by the report of an inquiry," said a Goldman spokesman. "We would fully cooperate with any requests for information."
A spokeswoman for the office of the Manhattan US Attorney said she could "neither confirm nor deny" any Goldman investigation. In Washington, a spokeswoman said the Justice Department declined to comment.
Prosecutors have not determined whether they will bring charges in the case, the Wall Street Journal said.
Any SEC referral for possible criminal prosecution would ramp up pressure on Goldman only two days after its CEO Lloyd Blankfein and other executives faced blistering cross-examinations from lawmakers at a hearing into its behavior in Washington.
In the closing hours of the questioning on Tuesday, Blankfein said that Goldman was doing some soul searching and going over its business practices as a result of the accusations it was facing.
There has since been speculation that Goldman might prefer to settle the SEC case to avoid further reputational damage. ID:nLDE63S11R ID:nN28138911
DIFFERENT DEALS
The criminal investigation is centered on different evidence than the SEC's civil case, according to the Journal, which added that it could not be determined which Goldman deals are being scrutinized in the investigation.
The SEC lawsuit against Goldman concerns collateralized debt obligations in transactions known as Abacus. The SEC accused Goldman of failing to tell investors that securities underlying Abacus were chosen by billionaire hedge fund investor John Paulson, who was betting that the securities would lose value.
US officials already have taken a close look at one other Goldman-backed transaction, known as Timberwolf 1, a so-called hybrid collateralized debt obligation that Goldman took to market in March 2007 just as the US housing market was beginning to crumble, Reuters reported on Tuesday.
A team of federal prosecutors in Brooklyn, New York, scrutinized the Timberwolf deal, said several people familiar with the investigation. They did so when pursuing a criminal case against two former Bear Stearns hedge fund managers because the Bear funds had been a major investor in that CDO.
Federal authorities examined the deal because Goldman sold a US$300 million portion of the CDO to the Bear funds in March 2007. Prosecutors were particularly intrigued by the fact that Goldman's mortgage trading desk began marking down the value of Timberwolf securities within a week of selling that US$300 million slug to the Bear funds and smaller pieces of the deal to other institutional investors, the sources said.
In fact, within five months, Timberwolf lost 80 percent of its value and was liquidated in 2008.
The Timberwolf deal ultimately did not factor into the criminal case against the Bear managers, who were acquitted of charges that they lied to investors.
Prosecutors concluded there was no evidence of any wrongdoing by either the Bear managers or anyone at Goldman, said sources familiar with the situation, who declined to be identified because the inquiries by federal prosecutors were never made public.
But the Senate hearing into Goldman's role in the mortgage mess has thrown a new spotlight on the Timberwolf transaction, which was the focus of a good chunk of the 900 pages of Goldman emails and marketing materials released by the committee.
The committee, in a report released prior to Tuesday's hearing, said one reason Goldman underwrote the Timberwolf deal was so it had a mechanism to "short" the subprime housing market and make money from the collapse of the securities.
The investigation from the Manhattan US Attorney's Office, which is at a preliminary stage, stemmed from a referral from the US Securities and Exchange Commission, the WSJ said, citing people familiar with the probe.
The SEC already has filed a civil fraud lawsuit against Goldman, the world's most powerful investment bank, charging that it hid vital information from investors about a mortgage-related security.
"Given the recent focus on the firm, we are not surprised by the report of an inquiry," said a Goldman spokesman. "We would fully cooperate with any requests for information."
A spokeswoman for the office of the Manhattan US Attorney said she could "neither confirm nor deny" any Goldman investigation. In Washington, a spokeswoman said the Justice Department declined to comment.
Prosecutors have not determined whether they will bring charges in the case, the Wall Street Journal said.
Any SEC referral for possible criminal prosecution would ramp up pressure on Goldman only two days after its CEO Lloyd Blankfein and other executives faced blistering cross-examinations from lawmakers at a hearing into its behavior in Washington.
In the closing hours of the questioning on Tuesday, Blankfein said that Goldman was doing some soul searching and going over its business practices as a result of the accusations it was facing.
There has since been speculation that Goldman might prefer to settle the SEC case to avoid further reputational damage. ID:nLDE63S11R ID:nN28138911
DIFFERENT DEALS
The criminal investigation is centered on different evidence than the SEC's civil case, according to the Journal, which added that it could not be determined which Goldman deals are being scrutinized in the investigation.
The SEC lawsuit against Goldman concerns collateralized debt obligations in transactions known as Abacus. The SEC accused Goldman of failing to tell investors that securities underlying Abacus were chosen by billionaire hedge fund investor John Paulson, who was betting that the securities would lose value.
US officials already have taken a close look at one other Goldman-backed transaction, known as Timberwolf 1, a so-called hybrid collateralized debt obligation that Goldman took to market in March 2007 just as the US housing market was beginning to crumble, Reuters reported on Tuesday.
A team of federal prosecutors in Brooklyn, New York, scrutinized the Timberwolf deal, said several people familiar with the investigation. They did so when pursuing a criminal case against two former Bear Stearns hedge fund managers because the Bear funds had been a major investor in that CDO.
Federal authorities examined the deal because Goldman sold a US$300 million portion of the CDO to the Bear funds in March 2007. Prosecutors were particularly intrigued by the fact that Goldman's mortgage trading desk began marking down the value of Timberwolf securities within a week of selling that US$300 million slug to the Bear funds and smaller pieces of the deal to other institutional investors, the sources said.
In fact, within five months, Timberwolf lost 80 percent of its value and was liquidated in 2008.
The Timberwolf deal ultimately did not factor into the criminal case against the Bear managers, who were acquitted of charges that they lied to investors.
Prosecutors concluded there was no evidence of any wrongdoing by either the Bear managers or anyone at Goldman, said sources familiar with the situation, who declined to be identified because the inquiries by federal prosecutors were never made public.
But the Senate hearing into Goldman's role in the mortgage mess has thrown a new spotlight on the Timberwolf transaction, which was the focus of a good chunk of the 900 pages of Goldman emails and marketing materials released by the committee.
The committee, in a report released prior to Tuesday's hearing, said one reason Goldman underwrote the Timberwolf deal was so it had a mechanism to "short" the subprime housing market and make money from the collapse of the securities.
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