Company cool amid reports of prosecutors looking to go beyond civil lawsuit
Federal prosecutors in New York have been examining transactions by Goldman Sachs Group, accused of fraud by United States securities regulators, to determine whether to pursue a criminal case, according to two sources.
The federal review, common in such a high-profile case, is being carried out by the US attorney in Manhattan, said the sources, who weren't authorised to comment and spoke on condition of anonymity.
The Securities and Exchange Commission (SEC) filed a civil lawsuit against Goldman Sachs on April 16, alleging fraud tied to collateralised debt obligations that contributed to the worst financial crisis since the Great Depression.
The New-York based company has already appeared before investigators at a congressional hearing this week.
The burden of proof in a criminal case would be higher than in the SEC's civil case. Criminal allegations have to be proven beyond reasonable doubt.
Based on public reports about the SEC charges, a criminal case might be difficult ,said Douglas Jensen, an attorney with Park & Jensen in New York. The case appears "highly complex" and Goldman Sachs would be able to make multiple arguments in its defence, he said. "In order to proceed criminally in a case, you need to have very clear evidence of lying, cheating and stealing," said Jensen, a former deputy chief of the criminal division of the US Attorney's office in the Southern District of New York, who has served on its securities fraud task force.
The US attorney's Southern District office "pretty consistently" reviews SEC cases that are "higher profile" such as those involving large dollar amounts or policy issues, he said.
The reviews can begin before the SEC files a lawsuit.
Yusill Scribner, a spokeswoman for US Attorney Preet Bharara declined to comment.
Goldman Sachs spokesman Lucas van Praag said the company would "fully co-operate with any requests for information".
"Given the recent focus on the firm, we're not surprised by the report of an inquiry," he said.
Goldman Sachs chief executive officer Lloyd Blankfein said this week: "It is my belief that nothing unethical and nothing illegal has happened, but I will tell you if I discovered something like this, or any senior person at Goldman Sachs discovered illegal or unethical behaviour, we would eliminate that from the firm."
The Federal Bureau of Investigation hasn't opened a criminal investigation, said a US official who spoke on condition of anonymity.
The Postal Inspection Service, which also could investigate such cases, doesn't have any open probes into Goldman, said Tom Boyle, a spokesman for the agency in New York.
Two former prosecutors for the US Attorney's office in New York, who also did not want to be named, said prosecutors have their own investigators who may be examining the case before determining whether to involve the FBI or postal inspectors.
The SEC may have given information from its investigation to prosecutors, allowing them to assess whether a criminal case could be made, they said.
The Justice Department sometimes brings criminal charges at the same time as the SEC files suit. In other instances, criminal charges come later.
The SEC sued financier Allen Stanford and his firm in February 2009 on claims he ran a Ponzi scheme. Stanford was indicted on criminal charges later that year. The SEC accused WorldCom Inc of fraud in 2002, and two senior executives were later arrested on criminal charges.
Goldman Sachs created and sold collateralised debt obligations (CDOs) linked to sub-prime mortgages in early 2007, as the US housing market faltered, without disclosing that hedge fund Paulson & Co helped pick the underlying securities and bet against the vehicles, according to the SEC's lawsuit.
At an April 27 congressional hearing, Goldman Sachs executives were questioned by US lawmakers who compared the bank's mortgage bankers to bookies. Company officials said they did nothing wrong.
"The SEC and the courts will resolve the legal question of whether Goldman's actions broke the law," said Senator Carl Levin, a Michigan Democrat who is chairman of the Permanent Subcommittee on Investigations, at the hearing. "The question for us is one of ethics and policy."
Levin, whose panel is investigating Goldman Sachs, said after the hearing that it was too soon to say whether he would refer any of the committee's findings to the Justice Department or SEC. Blankfein told Levin's panel that market-makers have no obligation to tell clients about their own position in a security. Billionaire John Paulson's firm earned US$1 billion ($1.38 billion) on the trades and wasn't accused of wrongdoing. The SEC has also sued Fabrice Tourre, a Goldman Sachs vice-president who helped create the CDOs, known as Abacus.