Goldman's CDO woes mean dollar signs for lawyers

Fri Jun 11, 2010 2:27pm EDT

* Goldman brings on Boies Schiller for CDO case

* Goldman's outside legal team keeps expanding

* Cost of fending off regulators keeps rising

By Matthew Goldstein and Steve Eder

NEW YORK, June 11 (Reuters) - Goldman Sachs Group Inc's (GS.N) mounting legal and regulatory woes stemming from the firm's sale of subprime mortgage-linked securities are turning into gold for a growing number of lawyers in New York and Washington.

The Wall Street investment firm tapped well known litigation specialists Boies, Schiller & Flexner to defend a lawsuit filed June 9 by an Australian hedge fund that seeks $1 billion in damages, said people familiar with the situation, but who declined to be identified because they were not authorized to speak on the matter.

David Boies, the New York-based firm's co-founder and chairman, is best known for overseeing the U.S. Department of Justice's antitrust case against Microsoft Corp (MSFT.O) and directing former Vice President Al Gore's Florida recount in the 2000 presidential election.

Boies Schiller will join with lawyers from Sullivan & Cromwell, Skadden Arps, Gibson Dunn & Crutcher and O'Melveny & Myers, all of whom have had a hand in advising Goldman on either a civil fraud lawsuit filed by the U.S. Securities and Exchange Commission or on dealings with other federal investigative bodies.

Goldman's rising legal tab is just one more example of fallout from myriad investigations and lawsuits facing the company as it fends off allegations from regulators, customers and shareholders that it used deceptive sales practices to market billions of dollars' worth of collateralized debt obligations.

To date, the regulatory scandal, which began with the filing of the SEC lawsuit on April 16, has cost Goldman $25 billion in market capitalization.

Goldman, which does not break out a specific line item for outside legal expenses in its quarterly financial reports, declined to comment on its legal defense strategy. It disclosed at its annual shareholder meeting that it paid $293 million in 2009 for outside legal expenses.

Jonathan Schiller, Boies Schiller's co-founder, who has represented Barclays Capital in the Lehman Brothers LEHMQ.PK bankruptcy, will oversee Goldman's defense to the lawsuit brought by Basis Yield Alpha Fund, sources said. Schiller could not be reached for comment.

Basis seeks to recoup the $56 million it lost on an investment in a CDO called Timberwolf that liquidated in 2008 -- a little over a year after Goldman underwrote the $1 billion deal. The now-defunct Basis fund, which contends Goldman misrepresented the value of the Timberwolf securities, also seeks $1 billion in punitive damages.

In the weeks leading up to the filing of the lawsuit, negotiations between Goldman and the Australian hedge fund had been led by Richard Klapper of Sullivan & Cromwell, people familiar with the situation said. But once the lawsuit was filed, Goldman decided to retain the Boies firm.

The Boies firm, sources said, may also work on other CDO-related matters facing Goldman.

Klapper, who could not be reached for comment, has been Goldman's lead outside lawyer in dealing with the SEC, which filed a civil fraud lawsuit over another CDO, Abacus 2007, on April 16.

In the wake of the SEC lawsuit, Goldman has been signing up other high-profile lawyers, some with deep political connections in Washington.

One of the first people Goldman turned to was Gregory Craig, a former White House counsel for President Barack Obama, and now a partner in Skadden's Washington office. Working with Craig is Skadden litigation partner Cliff Sloan, who served as associate counsel to former President Bill Clinton and has also represented the rock band Bon Jovi in a copyright infringement lawsuit, sources said.

Craig declined to comment on Skadden's legal work for Goldman.

Goldman, though, started building its outside legal team long before it was charged by the SEC on April 16.

For more than a year, the firm was the subject of a probe by the U.S. Senate Permanent Subcommittee on Investigations, a examination that concluded with a Capitol Hill hearing on April 27.

Two former subcommittee staffers -- K Lee Blalack, a partner with O'Melveny & Myers, and Michael Bopp, a partner with Gibson Dunn -- helped prepare Goldman Chief Executive Officer Lloyd Blankfein and other current and former executives for the widely publicized hearing. (Reporting by Matthew Goldstein and Steve Eder. Editing by Robert MacMillan)