Goldman Braces for Federal Subpoenas

[Vi-Jay 218]

Goldman Braces for Federal Subpoenas

by Liz Rappaport and Jean Eaglesham

Friday, May 20, 2011

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Bank Expects a Demand for Mortgage Documents; Move Would Follow Senate Subcommittee's Report

Goldman Sachs Group Inc. executives expect to receive subpoenas soon from U.S. prosecutors seeking more information about the securities firm's mortgage-related business, according to people familiar with the situation.

Officials at the New York company believe the Justice Department will demand certain documents and other information, possibly within days, these people said. Spokesmen for Goldman and the Justice Department declined to comment Thursday.

Subpoenas don't necessarily mean criminal charges against Goldman or individuals at the firm are inevitable or even likely. The company turned over hundreds of millions of pages of documents to the Federal Crisis Inquiry Commission, a 10-member panel that examined the causes of the financial crisis. Goldman also gave tens of millions of documents to the Senate Permanent Subcommittee on Investigations.

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Last month, the Senate subcommittee referred its findings to the Justice Department, and Goldman officials anticipate any subpoenas would be issued in response to the information now being sifted through by prosecutors, said the people familiar with the situation.

The subcommittee's 639-page report, completed after a two-year probe of the mortgage machine built by Wall Street firms before the crisis, accused Goldman of making a huge bet against the housing market, misleading investors, mismanaging conflicts of interests and putting its interests ahead of those of clients.

Sen. Carl Levin (D., Mich.), who leads the Senate subcommittee, has said Goldman should be investigated criminally for its actions during the financial crisis. He couldn't be reached for comment Thursday.

Goldman has said repeatedly that it simultaneously took "long" and "short" positions on mortgages as part of its normal business. While those bets sometimes resulted in a net short position, meaning Goldman would benefit from turmoil in the housing market, the company usually had a bullish overall bet during the crisis, according to the firm. As a result, Goldman suffered losses when the real-estate bubble burst.

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Last month, Goldman said it disagreed with "many of the conclusions of the report," though the company added that it takes "seriously the issues explored by the subcommittee." As part of last year's settlement of civil-fraud charges with the Securities and Exchange Commission, Goldman admitted making mistakes but denied wrongdoing in its handling of a mortgage-bond deal called Abacus 2007-AC1.

As part of the SEC's probe, which led to a $550 million settlement by Goldman, the company provided the agency with a mountain of trading records, business documents and emails. Goldman didn't admit or deny wrongdoing.

Since then, Goldman executives have worked hard to put the distracting, embarrassing mess behind the company. A revamp of internal procedures included more-detailed disclosures about lawsuits, regulatory investigations and other legal risks facing the company.

Goldman's latest quarterly report filed with the SEC included a 7,852-word "legal proceedings" section. In 2007's first quarter, which came just before the crisis erupted, the same section was just 406 words long.

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Investors remain jittery about Goldman's potential exposure to civil and criminal action. The company's share price sank last week after a Rochedale Securities analyst recommended dumping the stock, citing the possibility of criminal charges. On Thursday, Goldman shares slipped $1.50, or 1.1%, to $139.34 in 4 p.m. New York Stock Exchange composite trading.

"Any step in the direction of criminal charges would be bad news for Goldman's stock price," said Jeff Harte, an analyst at Sandler O'Neill + Partners LP.

Mr. Harte speculated that U.S. prosecutors are unlikely to bring criminal charges against Goldman because they probably already have seen much of the information amassed by the SEC during its civil investigation. The SEC has an information-sharing agreement with the Justice Department.

Criminal fraud cases face a higher legal hurdle than civil charges because prosecutors must prove to a jury that the defendant intentionally committed fraud. "Ordinarily, a criminal securities-fraud case based on the same facts would be even more difficult to prove," said Russell Ryan, a partner at law firm King & Spalding who previously was an SEC enforcement lawyer.

The SEC was split over proceeding with civil charges against Goldman for the Abacus deal, and the agency's five commissioners voted 3-2 in favor of filing a lawsuit.

U.S. officials are under pressure from lawmakers and many Americans to punish Wall Street executives for their actions during the financial crisis. Goldman's muscle in the financial markets and outsize profits compared with rivals have made the firm a focal point for public anger. Still, U.S. Assistant Attorney General Lanny Breuer cautioned last year that prosecutors "simply can't and won't indict people based on outrage or suspicion alone."

Thomas Catan contributed to this article.

Write to Liz Rappaport at liz.rappaport@wsj.com

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It's about damn time!

Find a few scapegoats and then look the other way. Again. annnnd Again.

Wonder when we the PEOPLE will get shorn again?

Edited May 20, 2011 by Vi-Jay