Goldman Sachs faces tough choice

James A. Cohen in USA Today, May 03, 2010

Media Source

By David Lieberman, USA TODAY
NEW YORK — Goldman Sachs faces a vexing dilemma, legal experts say, as the Justice Department conducts a criminal investigation into whether the financial services giant duped buyers of its securities.

Goldman could lose its vaunted reputation for integrity if it admits to wrongdoing as part of a deal to avoid criminal prosecution.

But if Goldman insists that it did nothing wrong — the position it has taken since April 16, when the Securities and Exchange Commission filed a civil lawsuit alleging securities fraud — then investors may fear that it will grow increasingly distracted by legal matters.

"This period of time is nothing but damage" for Goldman, says Jim Cohen, a professor at the Fordham Law School who specializes in white-collar crime issues.

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The U.S. Attorney's Office in Manhattan "is not doing an investigation because they need work," he adds. "They don't like what's come out in the last couple of weeks."

A federal law enforcement official briefed on the matter says the investigation predates the SEC referral that went to Justice a couple of weeks ago.

The value of Goldman's stock has fallen $21 billion — a fifth of its market value — since the SEC alleged that the firm created and sold a mortgage-backed security in 2007 without telling investors that it had been partly shaped by a hedge fund manager who bet that it would fail. Friday, Goldman's stock fell 9% to $145.20.

Lawyers say they doubt the Justice Department will sue Goldman, given a 2002 case against accounting firm Arthur Andersen. It was forced out of business when a U.S. District Court said the firm had obstructed an SEC investigation into the Enron scandal — and it could not be revived in 2005 when the U.S. Supreme Court overturned the verdict.

"The feeling is that indicting the whole company went too far," says Solomon Wisenberg, a partner at Barnes & Thornburg.

Instead, prosecutors might sue key executives or, more likely, propose a deal: The company could promise to change particular practices and let outsiders monitor the situation. "That is a way that most companies have resolved criminal investigations," says Tom Dewey, who specializes in corporate issues at law firm Dewey Pegno & Kramarsky.

That's why some observers are baffled by Goldman's defiant stance — including its decision to let Fabrice Tourre, an executive the SEC indicted by name, testify at a Senate hearing last week. "It was enormously stupid," Wisenberg says. "If I'm a prosecutor ... I'm going to look at everything he said ... and find something that's not true."

Cohen wonders if Goldman CEO Lloyd Blankfein would consider a settlement to avoid trial. "These are people with very big egos, and very big pockets, and they're used to doing what they want."