US PROSECUTORS are reviewing the evidence the US Securities and Exchange Commission has gathered about Goldman Sachs’s mortgage-backed securities business to determine whether to open a full criminal investigation, a person familiar with the matter has said.
The SEC filed a civil fraud case on April 16th against the investment bank and Fabrice Tourre, a relatively junior banker, and a Senate subcommittee has also been investigating, but a full criminal investigation would substantially increase the stakes for Goldman.
Goldman shares were down 9.4 per cent at $145.3 by lunchtime yesterday in New York and were downgraded to “neutral” from “buy” by Bank of America Merrill Lynch, who cited the reported investigations.
Unlike the UK’s Financial Services Authority, the SEC lacks criminal prosecution authority. Since 2002, the US regulator has routinely shared information with the department of justice about its ongoing investigations, and prosecutors make an independent decision whether and when to join in.
The US attorney’s office in Manhattan, the department’s arm that brings many high-profile securities cases, is said to be reviewing the case in light of the furore since the SEC filed its complaint.
It is understood that prosecutors have not yet sought information from the bank.
An SEC spokesman declined to comment.
The SEC contends that the bank misled two derivatives investors about the significant role played by a US hedge fund in selecting the mortgages that would determine the products performance.
Goldman and Mr Tourre deny that they did anything wrong in connection with the transaction.
“Given the recent focus on the firm, we are not surprised by the report of an inquiry,” a spokesperson for the bank said. “We would fully co-operate with any requests for information.”
Many department of justice reviews do not lead to formal investigations, let alone the filing of a criminal case. Prosecutors generally insist on much stronger evidence of fraud than the SEC needs for a civil case. A criminal case must be proved beyond a reasonable doubt, while the SEC can win if the preponderance of the evidence supports its charge.
Criminal fraud charges always require proof of an intent to defraud, while one of the two charges the SEC has used in its Goldman complaint only requires the regulator to show that Goldman and Mr Tourre acted “negligently”.
A criminal case against Goldman itself is even more unlikely because it raises the spectre of Arthur Andersen, the accounting firm that was prosecuted for obstructing the inquiry into the collapse of Enron. By the time the US Supreme Court eventually overturned the firm’s conviction, it had lost all its clients and employees.
That indictment is almost universally regarded as a terrible mistake and the department of justice has not filed a major indictment against a large corporation since then. – (Copyright The Financial Times Limited 2010)
