April 30, 2010 / 12:31 AM / 8 years ago

U.S. starts criminal probe into Goldman: source

WASHINGTON/NEW YORK (Reuters) - Federal prosecutors in New York have begun investigating Goldman Sachs Group Inc, raising the possibility of criminal charges against the company or its employees, a source familiar with the situation said on Thursday.

Goldman Sachs CEO Lloyd Blankfein is sworn in before testifying on Capitol Hill, April 27, 2010. REUTERS/Jason Reed

Goldman, the world’s most powerful investment bank, said it was not surprised at the news. “Given the recent focus on the firm, we are not surprised by the report of an inquiry,” a Goldman spokesman said. “We would fully cooperate with any requests for information.”

The investigation from the Manhattan U.S. Attorney’s Office ramps up pressure on Goldman less than two weeks after it was charged by the U.S. Securities and Exchange Commission with civil fraud for allegedly hiding information from investors about a mortgage-related security.

It comes only two days after Goldman CEO Lloyd Blankfein and other executives faced blistering cross-examinations from lawmakers at a Washington hearing into their behavior in trading mortgage-related products as the U.S. housing market began to crumble in 2007.

Goldman, which had prided itself on its government connections, is now facing one of the biggest crises in its 140 year history and has become a poster boy for criticism of Wall Street’s conduct that led up to the financial crisis.

In recent days there has been some speculation that Goldman might prefer to settle the SEC case to avoid further reputational damage.

In the closing hours of the questioning on Tuesday, Blankfein said Goldman was doing some soul searching and going over its business practices as a result of the accusations it was facing.

It was not immediately clear precisely which transactions prosecutors are investigating or whether there was a strong possibility that criminal charges could be brought.

News of the criminal probe was first reported by the Wall Street Journal, which said it resulted from a referral from the SEC.

A spokeswoman for the office of the Manhattan U.S. Attorney said she could “neither confirm nor deny” any Goldman investigation.

DIFFERENT DEALS

The criminal investigation is centered on different evidence than the SEC’s civil case, according to the Journal.

The SEC lawsuit against Goldman concerns collateralized debt obligations in transactions known as Abacus. The SEC accused Goldman of failing to tell investors that securities underlying Abacus were chosen by billionaire hedge fund investor John Paulson, who was betting that the securities would lose value.

U.S. officials already have taken a close look at one other Goldman-backed transaction, known as Timberwolf 1, a so-called hybrid collateralized debt obligation that Goldman took to market in March 2007 just as the U.S. housing market was beginning to crumble, Reuters reported on Tuesday.

A team of federal prosecutors in Brooklyn, New York, scrutinized the Timberwolf deal, said several people familiar with the investigation. They did so when pursuing a criminal case against two former Bear Stearns hedge fund managers because the Bear funds had been a major investor in that CDO.

Federal authorities examined the deal because Goldman sold a $300 million portion of the CDO to the Bear funds in March 2007. Prosecutors were particularly intrigued by the fact that Goldman’s mortgage trading desk began marking down the value of Timberwolf securities within a week of selling that $300 million slug to the Bear funds and smaller pieces of the deal to other institutional investors, the sources said.

In fact, within five months, Timberwolf lost 80 percent of its value and was liquidated in 2008.

The Timberwolf deal ultimately did not factor into the criminal case against the Bear managers, who were acquitted of charges that they lied to investors.

Prosecutors concluded there was no evidence of any wrongdoing by either the Bear managers or anyone at Goldman, said sources familiar with the situation, who declined to be identified because the inquiries by federal prosecutors were never made public.

But the Senate hearing into Goldman’s role in the mortgage mess has thrown a new spotlight on the Timberwolf transaction, which was the focus of a good chunk of the 900 pages of Goldman emails and marketing materials released by the committee.

The committee, in a report released prior to Tuesday’s hearing, said one reason Goldman underwrote the Timberwolf deal was so it had a mechanism to “short” the subprime housing market and make money from the collapse of the securities.

Additional reporting by Grant McCool, Matthew Goldstein, Martin Howell and Steve Eder in New York, James Vicini in Washington and Wayne Cole in Sydney; editing by Carol Bishopric

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