Goldman Sachs, already facing a Securities and Exchange Commission (SEC) civil lawsuit, might be the subject of a criminal probe. According to The Wall Street Journal, an unnamed source has said the U.S. attorney’s office in Manhattan is conducting a criminal investigation of the investment bank’s mortgage securities deals.
Earlier this month, the SEC filed a civil suit against Goldman Sachs, as well as Vice President Fabrice Tourre, over a financial product called Abacus 2007-AC1. As we reported previously, Abacus was a collateralized debt obligation linked to the performance of subprime mortgages that the SEC says was designed to lose money.
According to the SEC complaint, Goldman Sachs failed to disclose the role that hedge fund manager John A. Paulson played in selecting the Abacus portfolio, and did not reveal the fact that his hedge fund had taken a short position against it. Instead, marketing documents for Abacus indicated that the mortgage bond portfolio would be selected by a firm called ACA Management. According to the SEC, Paulson selected mortgage bonds for Abacus that he believed were most likely to lose value. When Abacus tanked, the Goldman Sachs clients who invested in it lost more than $1 billion.
According to the Journal, its source said the U.S. attorney’s investigation, which is in a preliminary phase, was prompted by an SEC referral. Whether the case will end up in criminal charges against Goldman or any of its executives remains to be seen. The filing of criminal charges would require evidence that showed that the firm or its employees knowingly committed fraud in their mortgage business. The burden of proof in a criminal case would be higher than in the SEC’s civil case.
Word of the U.S. attorney’s probe came one day after 61 House Democrats and one House Republican asked the Justice Department to open an investigation of Goldman.
News of a possible criminal probe is hurting Goldman’s stock price. According to a Bloomberg report, shares dropped $8.67, or 5.4 percent, to $151.57 at 9:45 a.m. in New York Stock Exchange composite trading. The stock price has slumped 18 percent since the SEC lawsuit was announced.
According to The Wall Street Journal, the news also prompted Standard & Poor’s to downgrade shares of Goldman Sachs to sell from hold. The ratings agency also changed their price target for the investment bank to $140 from $180.
