The U.S. attorney's office in Manhattan is conducting a criminal investigation of Goldman Sachs, stemming from a criminal referral by the Securities and Exchange Commission, a federal source said.
The source said the criminal inquiry by prosecutors in New York into misconduct allegations against Goldman had been under way for some time, and did not begin when the SEC announced earlier this month it was looking into allegations that the storied Wall Street bank sought to profit from the collapse of the housing market. The SEC accused Goldman of selling mortgage-related securities to investors while at the same time betting the securities would fail.
A criminal case against Goldman would face a much higher bar. There is also no guarantee that a criminal investigation would result in additional charges being brought against Goldman.
A spokeswoman for Manhattan U.S. Attorney Preet Bharara, citing office policy, said she could neither confirm nor deny the existence of an investigation. The SEC declined to comment.
Goldman has denied the allegations against the firm.
"Given the recent focus on the firm, we're not surprised by the report of an inquiry," Goldman spokesman Lucas van Praag said. "We would cooperate fully with any request for information."
The action was first reported by The Wall Street Journal
Goldman On The Defensive
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.
At the Capitol 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." Blankfein said the company didn't bet against its clients — and can't survive without their trust. He repeated the company's assertion that it lost $1.2 billion in the residential mortgage meltdown in 2007 and 2008. He also argued that Goldman wasn't making an aggressive negative bet, or short, on the mortgage market's slide.
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.
A collateralized debt obligation or CDO is a pool of securities, tied to mortgages or other types of debt, that Wall Street firms packaged and sold to investors at the height of the housing boom. Buyers of CDOs, mostly banks, pension funds and other big investors, made money off the investments if the underlying debt was paid off. But as U.S. homeowners started falling behind on their mortgages and defaulted in droves in 2007, CDO buyers lost billions.
It wasn't immediately known whether the Justice Department's inquiry also encompasses the five other transactions.
Government's Burden Of Proof
The investigation, even though at a preliminary stage, opens a momentous 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 and bailed-out insurance giant American International Group, the investigations also have targeted government-owned mortgage lenders Fannie Mae and Freddie Mac and crisis casualty Lehman Brothers.
Last August, a federal jury in New York convicted former Credit Suisse broker Eric Butler of conspiracy and securities fraud in connection with a $1 billion subprime mortgage fraud. But the swift acquittal in November of two former 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 SEC sued the two executives in a civil suit, and that case is still pending.
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.
Timing Of SEC's Civil Case Questioned
The SEC civil fraud case against Goldman also could be difficult and faces pitfalls, in the view of some experts. To prove it, they say, the agency must show that Goldman misled investors or failed to tell them facts that would have affected their financial decisions. The greatest challenge, the experts say, will be boiling the case down to a simple matter of fraud: the issues involved are so complex that Goldman may be able to introduce enough complicating factors to shed some doubt on the SEC's claims.
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."
NPR's Carrie Johnson contributed to this report, which includes material from The Associated Press