Goldman Sachs Faces Possible Criminal Case

by Glen Shapiro, LawAndTax-News.com, New York

05 May 2010

After the Securities and Exchange Commission (SEC) had charged it with defrauding investors, and following its testimony before a US Senate committee, Goldman Sachs now appears to be the subject of a criminal investigation over its arrangement of mortgage-backed securities.

Goldman's troubles began on April 16 when the SEC opened a civil case by charging Goldman Sachs and one of its vice presidents, Fabrice Tourre, with defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the US housing market was beginning to run out of steam in 2007.

The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities. According to the SEC, Goldman Sachs failed to disclose vital information about the CDO to investors, who are said to have lost more than USD1bn.

It is now reported that the SEC inquiry on Goldman’s CDO has also been referred to the US attorney’s office in Manhattan, which deals with bank and financial institution fraud, and that the attorney’s office is in the preliminary stage of deciding whether the investment house’s actions warrant a criminal investigation.

While there has been no confirmation from the attorney’s office that such a criminal action is being considered, Goldman Sachs strongly denied the SEC’s charges in its Senate committee testimony, and has said that it will vigorously defend itself.

At the annual meeting of Berkshire Hathaway Inc., Warren Buffet also spoke out in defence of Goldman Sachs, in which Berkshire Hathaway made a USD5bn preferred stock investment in 2008. He considers that Goldman Sachs was no worse than the rest of the investment banking world at the time of its arrangement of the CDO, when excesses were seen to be rife in the markets. He does not feel that Goldman Sachs should therefore be subject to particular criticism in that respect.

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