NEW YORK (Reuters) - Goldman Sachs Group Inc (GS.N) learned it was facing potential civil liability in the Abacus CDO case sometime in the past six months when it received a “Wells Notice” from the U.S. Securities and Exchange Commission, sources said on Friday.
Regulators send Wells Notices to firms or people to alert them of the likelihood that the government will file an enforcement action against them. Companies or people being investigated have the right to argue why they should not be charged by filing a “Wells submission.”
All that occurred with Goldman in the Abacus case, sources familiar with the situation told Reuters.
Public companies typically disclose when they or one of their employees receives a Wells Notice. There is no mention of Goldman or structured products executive Fabrice Tourre receiving a Wells Notice in the company’s regulatory filings.
Tourre, a Goldman vice president who the SEC said was mainly responsible for creating the mortgage product known as Abacus, is, like Goldman, facing fraud charges from the SEC over the marketing of the product.
Still, companies are not required to disclose Wells notices.
Additionally, there is no mention of the SEC investigation on Tourre’s broker registration statement on file with the Financial Industry Regulatory Authority (FINRA). It is customary for a brokerage firm to alert FINRA when one of its employees receives a Wells Notice from a regulatory agency.
A Goldman spokesman declined to comment on the Abacus case and the firm’s decision not to inform the public that it had received a Wells Notice from the SEC.
The filing of the SEC case against Goldman comes after the investment firm mounted an unprecedented public relations campaign to defend its image.
Most recently, the company issued a long letter to shareholders in which it defended its business practices and sought to rebut some of the populist outrage that has been building against the firm over the past year.
Earlier this month, BusinessWeek ran an in-depth story on Goldman Sachs, which included interviews with executives, under the headline: “Goldman Sachs: Don’t Blame Us.”
In January, CEO Lloyd Blankfein testified before a congressionally appointed panel investigating the causes of the financial meltdown and offered defenses of Goldman’s role in the crisis.
Goldman last year faced a public backlash for setting aside billions of dollars for bonuses soon after taxpayers rescued the financial services industry. As a result of the outcry, Goldman curbed its compensation pool at the end of 2009 and paid top executives all-stock bonuses.
Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University, said he would not have necessarily expected Goldman to disclose to shareholders the potential of SEC charges.
However, he questioned the timing of their public relations campaign.
“One would ask the question — if they knew that all of this was backing up behind the dam, why were they doing a public relations campaign?” Hurley asked. “They should have been doing damage control rather than talking about doing ‘God’s work.’”
That is a reference to Blankfein, who told London’s Sunday Times newspaper in November that banks serve a social purpose and are doing “God’s work.”
Reporting by Matthew Goldstein and Steve Eder in New York. Additional reporting by Rachelle Younglai in Washington. Editing by Robert MacMillan