NEW YORK/MONTREAL U.S. securities regulators are hunting for fresh dirt on Goldman Sachs Group Inc, hoping to bolster their lawsuit against the bank and perhaps force it to settle on terms more to the regulators' liking.
Two months ago the Securities and Exchange Commission charged Wall Street's most powerful bank with civil fraud in connection with a subprime mortgage-linked security. The case hinges on whether Goldman misled investors when it marketed Abacus 2007, a mortgage-linked security that turned toxic during the mortgage crisis.
Now, the SEC is also looking at other collateralized debt obligations that turned toxic, including Hudson Mezzanine Funding, a source familiar with the investigation said on Thursday.
"You put a number of things together and then it becomes harder to defend against all of them," said Annemarie McAvoy, a Fordham University School of Law professor and a former federal prosecutor. "So you finally cry uncle and say, 'Fine, I'll settle.'"
Goldman President Gary Cohn said on Thursday there were "no indications" that his firm was close to settling the SEC fraud charges. He was speaking to reporters after addressing a securities regulation conference in Montreal.
The SEC's expanding investigation of Goldman's CDOs comes as federal prosecutors probe some of the complex mortgage-linked transactions that Wall Street firms cobbled together and which helped spark the worst financial crisis in decades.
Even the Financial Industry Regulatory Authority is getting into the act. Reuters has learned the securities industry's self-regulatory agency recently began its own investigation into whether Wall Street banks violated customary sales practices in hawking CDOs to institutional investors.
A document reviewed by Reuters reveals FINRA is looking into potential improprieties in the structuring of the deals and the relationship between the CDO underwriters and mortgage lenders.
Former Goldman customers also are putting pressure on the bank and its chief executive, Lloyd Blankfein.
An Australian hedge fund sued Goldman on Wednesday, accusing the bank of misrepresenting the value of the Timberwolf CDO in 2007. The fund says its investment in Timberwolf contributed to its demise.
Reuters previously reported that SEC lawyers had looked at the $1 billion Timberwolf deal before filing the Abacus lawsuit in April.
The SEC's interest in the $2 billion Hudson CDO was first reported by the Financial Times.
Goldman shares are down more than 25 percent since the SEC filed its lawsuit on April 16. With pressure mounting on the bank this week, the shares were off 3.5 percent to $132.00 in Thursday afternoon trading.
STRENGTHENING THE CASE
U.S. Senator Carl Levin, during a hearing in April of the Senate's Permanent Subcommittee on Investigations, raised Abacus, Timberwolf and Hudson while questioning a cast of past and present Goldman employees, including Blankfein.
In a Senate floor speech in May introducing legislation to curb conflicts of interest in Wall Street deals, Levin zeroed in on Hudson Mezzanine 2006-1.
"When Goldman first sold the securities to its clients, more than 70 percent of Hudson Mezzanine had AAA ratings," he said. "But ... within 18 months Hudson was downgraded to junk status, and Goldman cashed in at the expense of its clients."
The Hudson deal closed in November 2006 and went into liquidation in May 2008.
The myriad investigations, coupled with the Timberwolf litigation, could create a tipping point at which Blankfein and other Goldman executives decide they have no choice but to reach some sort of comprehensive settlement, according to legal experts.
"Will there be more stuff? At this point, it certainly wouldn't surprise me," said White.
At the least, the SEC could be looking to bolster its Abacus case, which some saw as weak. SEC commissioners voted to bring the lawsuit in a split decision.
Fordham's McAvoy said the SEC's strategy could be to strengthen the initial case by adding new material from other deals.
"A lot of folks don't think the initial case is as strong as the SEC made it out to be," McAvoy said.
(Reporting by Steve Eder in New York and Rachelle Younglai in Montreal; editing by John Wallace)