Criminal Probe May Force Goldman's Hand: Experts

Paul Radvany in Law360, April 30, 2010

Media Source

By Abigail Rubenstein

Law360, New York (April 30, 2010) -- Federal prosecutors reportedly have begun a criminal investigation into trading at Goldman Sachs Group Inc., and experts say the increased pressure may push the Wall Street giant toward settlements.

The U.S. Securities and Exchange Commission referred its civil fraud investigation to the U.S attorney's office for the Southern District of New York, and prosecutors have opened their own inquiry, The New York Times reported Thursday.

“Given the recent focus on the firm, we are not surprised by the report of an inquiry. We would fully cooperate with any requests for information,” a representative for Goldman Sachs said Friday.

The U.S. attorney's office would neither confirm nor deny the existence of an investigation.

“For Goldman this is now becoming life and death,” said George Washington University Law School professor Lawrence E. Miller, explaining that firms like Goldman live and die by their reputations for integrity. And a trial is not in the firm's interest, he said.

A criminal case is more likely than a civil one to grab headlines, creating a potential public relations nightmare that could give Goldman an incentive to settle, especially if the firm could reach a global resolution with both the SEC and the U.S. Department of Justice, according to Pravin B. Rao, a partner at Perkins Coie LLP and a former SEC Enforcement Division chief.

“This might come down to what Goldman's stomach is for how long it stays on the front page,” Rao said.

Southern Illinois University of Law professor Mark R. Lee said: “If an indictment is returned, some people in the firm's top executive ranks will look for ways to make that go away. And that may mean a settlement or a consent arrangement, whether or not Goldman Sachs feels there is much risk of a guilty verdict after a trial.”

While reputational concerns may end up predominating for Goldman's strategy, attorneys say there are other reasons that a criminal investigation ratchets up the pressure on the firm.

The government faces a much higher burden of proof in a criminal proceeding, but it also has more resources at its disposal for discovery — and has potentially more compelling offers it can make to Goldman employees to get them to spill the details of transactions.

When Fabrice Tourre, a vice president at Goldman, was named as an individual defendant in the SEC's case, many speculated that the government's endgame involved getting him to flip on other more highly placed executives. And the threat of jail time could certainly persuade Tourre to do just that, attorneys say.

The SEC's complaint, filed April 16 in the U.S. District Court for the Southern District of New York, accused the investment bank of playing both sides in creating a collateralized debt obligation made up of mortgage-backed securities that was designed to fail, reportedly costing investors well over $1 billion.

Goldman allegedly did not reveal to either investors or the company responsible for selecting the subprime mortgages for the synthetic CDO that hedge fund Paulson & Co. had taken out credit default swaps against the CDO, betting that the value of the mortgages would plummet.

Goldman has denied the government's allegations.

"The fact that a criminal investigation has begun may mean that the SEC believes that there may have been some criminal conduct,” said Fordham Law Professor Paul Radvany, a former deputy chief of the Criminal Division in the U.S. attorney’s office for the Southern District of New York.

“However, it is too early to tell whether or not the government will bring criminal charges,” Radvany told Law360. “Clearly the government will carefully investigate the facts before determining how to proceed.”

Whether the government ultimately pursues a criminal case against Goldman, the reports of an investigation have likely gotten Wall Street's attention.

“After the SEC filed suit, some questioned whether it was a political ploy to help pass financial reform, but a criminal investigation underscores the seriousness with which government is pursuing these issues,” Ulmer & Berne LLP's Scott Meyers said.

--Additional reporting by Julie Zeveloff