[THS] U.S. Prosecutors, SEC Probe Mortgage Deals, WSJ Says

[The Harder Stuff in news and commentary]

http://www.bloomberg.com/apps/news?pid=20601087&sid=apMtk_UXqLEg&pos=3

U.S. Prosecutors, SEC Probe Mortgage Deals, WSJ Says (Update2)

By Chris Peterson and Joost Akkermans

May 13 (Bloomberg) -- U.S. prosecutors and the Securities and Exchange
Commission are cooperating in a preliminary criminal probe into whether banks
misled investors about their participation in mortgage-bond deals, the Wall Street
Journal said, citing a person familiar with the matter.

JPMorgan Chase & Co., Deutsche Bank AG, UBS AG and Citigroup Inc. have received
civil subpoenas from the SEC, the newspaper said today. Goldman Sachs Group Inc.
and Morgan Stanley are already being investigated under similar preliminary criminal
scrutiny, the Journal said. Separately, New York Attorney General Andrew Cuomo is
probing eight firms over whether they misled rating companies, the New York Times
said.

Wall Street firms are facing scrutiny from prosecutors and lawmakers over whether
they improperly sold collateralized debt obligations linked to the subprime mortgages
that caused the credit crisis. Goldman Sachs is contesting a lawsuit from the SEC,
which alleges the firm misled investors about a mortgage- linked security in 2007.

Prosecutors so far are gathering evidence and haven’t issued criminal subpoenas, or
determined the outlines of any potential case, according to the Journal. To win a
criminal case, the prosecutors would have to prove beyond a reasonable doubt that a
firm or its employees intentionally misled investors, it reported.

Banks Respond

Chris Cockerill, a Hong Kong-based spokesman for UBS, and James Griffiths, a
spokesman for Citigroup, declined to comment on the Journal article when contacted
by Bloomberg News. Fiona Laffan, a spokeswoman for Goldman Sachs in London,
and Michael Golden, a London-based spokesman at Deutsche Bank, also declined to
comment.

Morgan Stanley told the newspaper it hasn’t been contacted by prosecutors and has
done nothing wrong. Spokesman Wesley McDade in London declined to comment
today. A spokesman for JPMorgan said the bank “hasn’t been contacted” by federal
prosecutors and isn’t aware of any criminal investigation, the Journal said. David
Wells, a London-based spokesman for JPMorgan didn’t have an immediate comment.

SEC spokesman John Heine and Justice Department spokeswoman Laura Sweeney
didn’t immediately return calls after regular business hours. Spokespeople for the
Manhattan U.S. Attorney’s office declined to comment, the Journal said.

Allegations Denied

Morgan Stanley Chief Executive Officer James Gorman, speaking in Tokyo yesterday,
denied allegations the U.S. bank misled investors about mortgage derivatives. The
executive responded to a Journal article saying the firm is being probed by U.S.
prosecutors over whether it misled clients when it sold them CDOs as its own traders
bet that the value of the securities would drop. The New York-based firm hasn’t been
contacted by the Justice Department, Gorman said.

The probe stemmed from an civil-fraud investigation of more than a dozen Wall
Street firms’ mortgage bond businesses by the SEC that began in 2009, the Journal
said yesterday. The Manhattan U.S. Attorney’s office is conducting a criminal probe
into some of those firms’ activities, it said.

Cuomo is investigating whether Goldman, Morgan Stanley, UBS, Citigroup, Credit
Suisse, Credit Agricole SA, Deutsche Bank and Bank of America Corp.’s Merrill Lynch
misled rating companies to obtain higher ratings, the New York Times said. Cuomo
issued subpoenas on Wednesday, the newspaper reported.

Cuomo’s spokesman Richard Bamberger didn’t return a call after business hours.
Officials for Citigroup and Bank of America didn’t have an immediate comment.
Spokesmen for Morgan Stanley, Goldman, UBS, Credit Suisse Group AG, Credit
Agricole SA and Deutsche Bank declined to comment to Bloomberg News.

Government officials in the U.S. are seeking to assuage public anger over bank
bailouts by tightening regulations after the worst financial crisis since the Great
Depression. The changes are intended to prevent a repeat of the crisis that led to
$1.78 trillion in writedowns and losses by financial firms.