U.S. senators formally referred to the Justice Department and the Securities and Exchange Commission an investigative report that found Goldman Sachs Group Inc. (GS) misled clients about mortgage-linked securities.
Senators Carl Levin of Michigan, the Democratic chairman of the Permanent Subcommittee on Investigations, Tom Coburn of Oklahoma, the senior Republican, signed a letter asking the agencies to examine the panel’s report, Levin said in an interview yesterday. The results of the investigation, made public by the committee April 13, lay much of the blame for the credit crisis on Wall Street banks that earned billions by enticing clients to buy the risky bond deals.
“If something comes up that needs to be reviewed by some agency, it gets referred,” said Levin. “That’s the way we do it.”
The scrutiny is a setback for Goldman Sachs, which hired lawyers, lobbyists and public relations specialists to monitor the two-year Senate probe and tamp down any controversy that arose from the subcommittee’s conclusions.
John Hart, Coburn’s spokesman, did not respond to a request for comment. SEC spokesman John Nester declined to comment.
Levin said in the interview that the referral sends the entire report, rather than specific facts, to the agencies. The Senate inquiry also examined the role of credit-rating firms in the meltdown, lax oversight by regulators and the decline in lending standards at banks including Washington Mutual Inc. that fueled the mortgage bubble.
Top of List
A formal referral from the Senate is “much more than a symbolic gesture” because it would prompt an agency to put the matter “at the top of its list,” said Robert Hillman, a professor at the University of California, Davis, School of Law.
For Goldman Sachs, “the question is how much pain they’re going to have to endure with the public spotlight for these revelations, and that depends in part how long the government’s willing to drag this out,” said James Cox, a securities law professor at Duke University School of Law.
Still, Cox said he is “very skeptical” that the examinations by the agencies will ultimately lead to new claims against Goldman Sachs, which last year paid $550 million to settle SEC claims related to its marketing of the complex securities known as collateralized debt obligations.
Attorney General Eric Holder, testifying before the House Judiciary Committee yesterday, confirmed that his department is scrutinizing the report. Two people briefed on the matter confirmed that the SEC enforcement division is also studying it.
Holder, in his comments, didn’t offer any specifics though he did single out the New York-based bank in his remarks.
“The department is looking right now at the report prepared by Senator Levin’s subcommittee that deals with Goldman Sachs,” Holder said.
When the report was released, Levin said he wanted the Justice Department and the SEC to examine whether Goldman Sachs violated the law by misleading clients who bought CDOs without knowing the firm would benefit if they fell in value.
Levin also said at the time that federal prosecutors should review whether to bring perjury charges against Goldman Sachs Chairman and Chief Executive Officer Lloyd Blankfein and other current and former employees who testified to Congress last year. Levin said they denied under oath that Goldman Sachs took a financial position against the mortgage market solely for its own profit, statements the senator said were untrue.
‘Truthful and Accurate’
When the report was released, Goldman Sachs said it never misled anyone about its activities. “The testimony we gave was truthful and accurate and this is confirmed by the subcommittee’s own report,” Goldman Sachs spokesman Lucas van Praag said.
David Wells, a spokesman for Goldman Sachs, declined to make any additional comment yesterday. The company’s shares advanced 57 cents to $151.87 at 4:01 p.m. in New York Stock Exchange composite trading.
While the panel levied its harshest criticism at Goldman Sachs, it also accused Deutsche Bank AG of selling collateralized debt obligations backed by risky loans that the bank’s own traders believed were likely to lose value.
Deutsche Bank spokeswoman Michele Allison said at the time: “As the PSI report correctly states, there were divergent views within the bank about the U.S. housing market. Moreover, the bank’s views were fully communicated to the market through research reports, industry events, trading desk commentary and press coverage. Despite the bearish views held by some, Deutsche Bank was long the housing market and endured significant losses.”
Separately yesterday, the Justice Department sued Deutsche Bank and one of its mortgage units for more than $1 billion for allegedly lying to qualify thousands of risky mortgages for insurance by the Federal Housing Administration. The bank said the claims were “unreasonable and unfair.”
Goldman Sachs’s settlement with the SEC last year resolved claims that it failed to disclose that hedge fund Paulson & Co was betting against, and influenced the selection of, CDOs the company was packaging and selling.
The Senate report reveals details of four Goldman Sachs CDOs. One was named Abacus, the CDO at the center of the SEC civil claim that led to the bank’s settlement last year. Others were Timberwolf, Anderson and Hudson.
E-mails and Documents
According to the people briefed on the SEC’s review of the Senate report, who spoke on condition of anonymity because the matter isn’t public, investigators at the agency will scrutinize interviews, e-mails and other confidential documents that surfaced in the inquiry. While much of that evidence was seen by the SEC before its 2010 settlement, some is new, the people said.
Hillman, the law professor, said that given Goldman Sachs’s earlier settlement, the SEC or Justice Department would likely have a high bar for bringing a case against the bank.
In resolving that case, Goldman Sachs admitted no wrongdoing and said in a regulatory filing it “understands that the SEC staff also has completed a review of a number of other Goldman mortgage-related CDO transactions and does not anticipate recommending any claims against Goldman or any of its employees.”
The SEC’s enforcement division is “certainly free to revisit that, but the odds are that it won’t unless something very new comes out in the way of facts,” said Hillman. “The SEC has probably taken its major step with Goldman already.”