[THS] Justice Department opens Goldman Sachs criminal investigation

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http://www.informationclearinghouse.info/article25355.htm

Justice Department opens Goldman Sachs criminal investigation, sources say

By Zachary A. Goldfarb and Jerry Markon

April 30, 2010 "Washington Post" -- The Justice Department has opened a criminal
investigation into possible securities fraud in mortgage trading at Goldman Sachs, law
enforcement sources said Friday.

The U.S. attorney's office in Manhattan and the FBI are conducting the probe, which
sources said has been underway for weeks. The sources, who spoke on the condition
of anonymity because the investigation has not been publicly disclosed, said no
charges -- or a decision on whether to file them -- are imminent.

The Securities and Exchange Commission filed a civil securities fraud case against the
firm two weeks ago, and a source familiar with the matter said the SEC had referred
that investigation to the Justice Department for possible criminal prosecution. But law
enforcement sources said the probe by the Manhattan U.S. attorney's office -- which
is known for aggressively investigating financial fraud cases -- was not based on an
SEC referral and was underway before the SEC announced the civil case April 16.

It was not immediately clear if the FBI and prosecutors are probing different
mortgage-related transactions than those at issue in the civil case. No Goldman Sachs
employees involved in the mortgage-related transactions that are the focus of the
SEC case have been interviewed by Justice Department prosecutors or FBI agents,
another source familiar with the matter said.

The Justice Department typically investigates high-profile cases of securities fraud,
but the threshold for criminal prosecution is significantly higher than that of civil
cases, and such investigations are highly complex.

Given the recent focus on the firm, "we're not surprised by the report of an inquiry,"
said Goldman spokesman Lucas Van Praag. "We would cooperate fully with any
request for information."

Although the SEC frequently sends its cases to the Justice Department for possible
criminal prosecution, the stakes are higher because the Goldman case involves one of
Wall Street's most storied firms, a business that had survived the financial crisis with
its profitability intact but now faces accusations that it misled clients.

It is rare for the government to indict a company, and even the threat of criminal
prosecution can doom a business. A criminal investigation destroyed the Wall Street
firm Drexel Burnham Lambert in the 1980s even though the firm settled with
authorities.

And although the Supreme Court ultimately overturned the conviction, accounting
firm Arthur Andersen collapsed after facing criminal charges in connection with
corporate corruption at Enron in 2002.

In that case, the justices said that lower courts had given juries far too broad
guidelines by which to decide whether to convict the company. The decision, lawyers
at the time said, would make it more difficult for prosecutors to bring criminal cases
against corporations.

The SEC says that Goldman and employee Fabrice Tourre broke the law and
committed fraud when they sold clients a complex investment linked to the value of
home loans that was secretly designed to fail. Another firm, Paulson & Co., a hedge
fund, helped Goldman create the investment and planned to bet against it. But the
SEC says the relationship was not disclosed to Goldman's clients, ACA Financial
Guaranty and the German bank IKB.

Goldman and Tourre have denied any wrongdoing. Goldman says that ACA and IKB
were sophisticated investors and that disclosure of Paulson's role was not required.

Proving a criminal case could be challenging given that prosecutors must show
"beyond a reasonable doubt" that Goldman and its employees committed fraud,
compared with the threshold for a civil case, which requires a "preponderance of
evidence."

Under civil law, the SEC does not have to prove that Goldman set out to defraud
investors -- only that it did. But criminal law would require prosecutors to show that
Goldman maliciously planned to mislead its investors.

Since the SEC filed its lawsuit this month, securities lawyers have debated the merits
of the agency's case. Most agree that it represents an ambitious legal theory, saying
the bar to show that Paulson's role was relevant would be high because the financial
firms involved were big and engaged in speculative betting.

Goldman also says ACA was told about Paulson's role, and the firm has written a
letter to its investors strongly suggesting that was the case.

The Justice Department suffered a setback this year when a case against two Bear
Stearns hedge fund managers failed. A jury rejected securities fraud charges against
the hedge fund managers, who ran funds linked to subprime mortgages, after
presenting evidence that the men knew about risks but did not disclose these to
investors.

The SEC is still pursuing the Bear Stearns case.


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