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Reports of criminal probe send Goldman Sachs stock plunging

Federal prosecutors are said to have been investigating the firm’s conduct since the SEC filed a civil fraud suit against it two weeks ago. Shares fall nearly 10% on Friday.

May 01, 2010|By Nathaniel Popper, Los Angeles Times

Reporting from New York — Goldman Sachs Group Inc. shares tumbled Friday on reports of a federal criminal probe into the company's conduct.

Prosecutors in the U.S. attorney's office in Manhattan have been investigating Goldman since the Securities and Exchange Commission filed a civil fraud lawsuit against the firm two weeks ago, according to people familiar with the situation.

Such a move is not unusual when the SEC brings a fraud suit, and former federal prosecutors said the firm was not in significantly more danger now than it was when the suit was announced.

A spokeswoman for the U.S. attorney's office said she couldn't confirm or deny the existence of a criminal investigation.

Goldman issued a statement Friday saying, "Given the recent focus on the firm, we are not surprised by the report of an inquiry."

But investors were spooked by the news and sent Goldman's shares down $15.04, or 9.4%, to $145.20, their lowest close since last July. The stock is down 21% since April 15, the day before the SEC took it to court.

Matthew Albrecht of Standard & Poor's, one of at least three stock analysts who lowered their ratings on Goldman shares Friday, said he wasn't assuming that criminal charges would be filed. But he predicted a challenging road ahead for the investment bank because of the combined effect of the SEC suit, a possible criminal case, a likely tightening of financial regulations and the damage to the firm's image from this week's marathon grilling of Goldman executives by a Senate panel.

"I wouldn't say charges are imminent, but just the risk of that piles on with everything else," Albrecht said. "There are just better, safer opportunities elsewhere."

The Goldman news contributed to an overall decline in the stock market Friday. The Dow Jones industrial average dropped 158.71 points, or 1.4%, to 11,008.61. The broader Standard & Poor's 500 index lost 1.7%. Financial stocks in the S&P slid 2.5% on average, more than any other broad industry group.

The SEC lawsuit accused Goldman of fraudulently selling a complex, mortgage-linked security without telling the buyers that it had been designed at least in part by someone who planned to bet on its failure.

This week, 62 members of the House of Representatives signed a letter to Atty. Gen. Eric Holder asking for a criminal probe of Goldman.

"If the [ Justice Department] is not currently looking into this particular case, we respectfully ask you to ensure that the U.S. Department of Justice immediately open a case on this matter and investigate it with the full authority and power that your agency holds," the letter reads.

It's standard procedure for the U.S. attorney's office in Manhattan to look at cases the SEC is investigating, said Steven Feldman, a former prosecutor in that office.

Typically, if prosecutors viewed a probe as promising, they would be further into at this point than it appears the U.S. attorney's office is with the Goldman inquiry, Feldman said.

"The fact that it is only being investigated now, and the fact that is coming amid the public pressure from folks in D.C., makes me wonder how serious the criminal aspects of this are," said Feldman, now with New York law firm Herrick, Feinstein.

Goldman's general counsel, Gregory Palm, told investors last week that the Justice Department had not contacted the firm. The statement Goldman issued Friday left the impression that it still had not been contacted.

Because in criminal trials, guilt must be proved beyond a reasonable doubt, prosecutors would have a harder time pressing a criminal case than the SEC will have in pursuing its lawsuit.

These difficulties were evident in the one high-profile criminal case that the Justice Department has brought against investment bank employees in the wake of the financial crisis. In that case, two former hedge fund managers at Bear Stearns were acquitted of charges of securities fraud.

But criminal charges would bring a new level of scrutiny to Goldman. Subpoena powers in criminal cases are broader and thus could lead to more revelations.

"The fallout of any criminal investigation runs the risk of much more serious consequences than a civil investigation," said Robert Mintz, a former federal prosecutor who now works at the firm McCarter & English.

A criminal case brought against the company as a whole could be especially damaging. However, federal prosecutors in recent years have tended to bring cases only against individual employees, as with the Bear Stearns executives.

The latest developments will make it more difficult for Goldman to win new investment banking business, said Albrecht at Standard & Poor's.

"It's harder for the company to gain new clients that might be a little dubious about doing business with a firm that is under investigation and that has that hint of lax ethical standards floating around it," he said.

nathaniel.popper@latimes.com

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