June 1, 2010 / 4:44 PM / 10 years ago

Exclusive: Goldman's bid didn't disclose probe to Calpers

NEW YORK (Reuters) - Goldman Sachs Group Inc, seeking a consulting mandate from Calpers, assured the pension fund giant in March that it was not “the target of a formal investigation,” according to a document obtained by Reuters.

That was six months after U.S. securities regulators notified the powerful Wall Street bank that it was likely to be charged with fraud in connection with the underwriting and marketing of a $1 billion subprime-mortgage-linked security.

On April 16, the Securities and Exchange Commission filed a civil suit against Goldman over that transaction.

Goldman’s assurances to the California Public Employees’ Retirement System came on the bank’s March 18 application to become a real estate investment consultant to the largest U.S. public pension fund.

Calpers spokesman Brad Pacheco told Reuters the pension fund’s investment staff “will be reaching out to Goldman for an explanation on their response.” The investment staff is finalizing contracts for Calpers’ consultant pool, which will be effective July 1.

Goldman’s response to Calpers could reignite the debate about whether the Wall Street firm had an obligation to inform shareholders and potential clients that the SEC had sent it a so-called Wells Notice — a letter alerting the firm of the likelihood of a regulatory enforcement action.

The securities watchdog notified Goldman last September that it was considering filing an enforcement action over the sale of the ABACUS 2007-AC1 collateralized debt obligation.

In the aftermath of the SEC lawsuit, a number of shareholder lawsuits have been filed against Goldman alleging that investors were damaged by the investment firm’s decision not to disclose the Wells Notice months ago.

Shares of Goldman fell 12 percent on the day the SEC sued Goldman and have lost more than 20 percent since then.

Pacheco said Goldman is one 32 firms the giant pension fund is considering to serve as consultants on real estate-related investments. He said Calpers has not yet made a decision about hiring Goldman or any of the other firms and that its investment staff is in the process of finalizing contracts for the consultant pool.

A Goldman spokesman declined to comment.

Goldman previously has said it did not disclose the Wells Notice in regulatory filings because its lawyers concluded the issue was immaterial to the firm’s overall revenues.

Wall Street analysts have speculated a settlement with the SEC might cost Goldman $500 million to $1 billion.

DISCLOSURE

Goldman’s application to Calpers, obtained by Reuters, was not submitted under oath, and it is not known if the document was reviewed by Goldman’s counsel’s office. The application is signed by Kristin Gannon, a Goldman managing director and West Coast head of real estate investment banking for the firm.

Goldman’s comment on the Calpers application that it was not the target of a formal investigation was made in response to a question seeking information about “any business litigation or other legal proceedings relating to your consulting activities.”

Goldman wrote that its investment banking division “is not known by the firm to be the target of a formal investigation for violation of any regulatory agency.” It added the caveat that “from time to time” it receives “inquiries, subpoenas, and notices of investigation relating to various aspects of its business.”

Jacob Zamansky, a New York securities attorney who filed one of the shareholder suits over Goldman’s failure to disclose the Wells Notice, said, “It looks like Goldman was in denial.”

CLIENTS AS PARTNERS

Goldman, in the application, also makes the point that it puts the interests of its clients first.

“Our experience shows that if we serve our clients well, our own success will follow,” the firm wrote. In response to another question, Goldman said it “treats all of our clients as partners.”

But critics of the bank contend the SEC lawsuit is proof that Goldman is no less self-interested than any other Wall Street firm.

The SEC charges that Goldman took advantage of institutional customers by selling a CDO without disclosing that hedge fund manager John Paulson was both shorting the deal and simultaneously helping to pick the underlying portfolio of mortgage-backed securities.

Goldman officials repeatedly have said the firm did nothing wrong in marketing the Abacus deal. The firm has said it will mount a vigorous defense to the SEC charges.

CALPERS EYES GOLDMAN

Calpers has a long history of holding companies that do business for it to a higher standard.

After the SEC’s charges were announced in April, Calpers officials told the Los Angeles Times that they were “disturbed” and that they planned to question Goldman executives.

“We will see what develops,” Chief Investment Officer Joseph Dear told the newspaper. “Our corporate governance folks are examining Goldman Sachs in respect to their practices.”

Earlier this month Calpers weighed in on the side of a proposal that would have forced Goldman to split the roles of chairman and chief executive. The shareholder-initiated proposal was defeated.

Reporting by Steve Eder and Matthew Goldstein; editing by John Wallace

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