U.K. and German financial regulators are investigating whether they can take action against Goldman Sachs Group Inc. in relation to a lawsuit filed last week by the U.S. Securities and Exchange Commission.
The Financial Services Authority is investigating “whether there are any implications for the U.K.-regulated entities of Goldman Sachs,” Leigh Calder, an FSA spokesman, said in an interview. “If there are, we will take appropriate action. We work closely with overseas regulators and will cooperate fully with the SEC.”
The FSA’s preliminary investigation follows comments from Prime Minister Gordon Brown today that the regulator would probe the bank because there were “individuals that had questions to answer.” He repeated that employees of the bank exhibited “moral bankruptcy.”
The SEC filed a suit against the New York-based bank on April 16, citing fraud and misrepresentation in the marketing of a collateralized debt obligation linked to subprime mortgages. Goldman Sachs fell 13 percent that day and the shares fell 1.5 percent to $159.16 at 11:21 a.m. in New York Stock Exchange trading today.
The SEC alleges that in early 2007, as U.S. home prices were falling, Goldman Sachs created and sold a CDO without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against the vehicle, known as Abacus 2007-AC1. The hedge fund wasn’t named in the lawsuit.
Goldman Sachs pledged it would fight the case and denies wrongdoing.
Germany’s BaFin will request information from the SEC and review the facts before deciding on what steps to take, the regulator’s spokeswoman Sabine Reimer said in an interview today. The German securities regulator only learned about the suit when the SEC disclosed it on April 16, Reimer said.
The FSA will need to show that either individuals or companies based in the U.K. were involved in wrongdoing to take action, lawyers said. The regulator can ban individuals or fine companies, they said.
The SEC named Fabrice Tourre, a Goldman Sachs vice president, in the suit. While Tourre works in the bank’s London office, he moved to London in November 2008, FSA records show. The SEC is examining conduct before that date.
“What we’re talking about is a possible conflict of interest. That’s what it boils down to,” said Ben Blackett-Ord, the chief executive officer or London-based Bovill Ltd., which advises companies on regulation. “The FSA would be looking at whether the firm has appropriate procedures in place to prevent conflicts.”
False and Misleading
The FSA can also criminally prosecute individuals for making false and misleading statements, which carries a maximum penalty of seven years in jail.
“If the FSA could show that Goldman Sachs had made a misleading statement about an investment and it took place in the U.K., then the FSA could be the prosecuting authority,” said Simon Morris, a regulatory lawyer at London-based CMS Cameron McKenna.
Another U.K. prosecutor, the Serious Fraud Office, hasn’t opened a formal investigation into the case. It typically prosecutes complex and cross-border frauds.
“We routinely monitor situations of reported concern to see if the circumstances might warrant a more formal SFO involvement,” David Jones, an SFO spokesman, said in an e-mail.
IKB, RBS Losses
German and British banks both lost money because of the fraud, according to the SEC suit. The Royal Bank of Scotland Group Plc unwound a position in Abacus bought by its ABN Amro unit by paying Goldman $840.9 million, the SEC said. Germany’s IKB Deutsche Industriebank AG lost nearly all of its $150 million investment in Abacus, according to the lawsuit.
RBS, which is majority-owned by the U.K., may consider taking legal action against Goldman Sachs, Brown said in a Bloomberg Television interview today. RBS declined to comment.
“The FSA is very prudent about using its powers and it isn’t very likely to be bounced into this by the prime minister seeking to score political points,” said CMS’s Morris. “It doesn’t prosecute cases that it isn’t reasonably certain it can win.”
The FSA was created by Brown in 1997. He now faces an election on May 6. Opposition Conservatives say they will carve up the FSA’s powers if they are successful in ousting Brown’s Labour government.
IKB is examining all options including legal action, Patrick von der Ehe, a spokesman for the Dusseldorf-based bank, said today.
While Bafin can investigate and issue fines in some cases, it can’t bring a criminal case without assistance from prosecutors.
Andreas Tilp, a German attorney who represents an IKB shareholder in a case over the lender’s subprime losses, said the bank should file its own civil suit against Goldman. The U.S. would be the best jurisdiction to file a suit because IKB could initiate a class action, or group, case, he said.
“IKB could just take the SEC’s complaint as a boiler plate and file its own suit; it would be pretty simple,” he said. Chancellor Angela Merkel should “use her political influence to make IKB sue Goldman in the U.S. instead of setting her hopes on some action by BaFin,” he said.
France’s securities regulator, the Autorite des Marches Financiers, said it was examining whether any French investors lost money.
“The investigations concerns foremost the United States, and we have no evidence at this stage that would lead us to think that this possibly fraudulent activity could have been committed under French jurisdiction,” an AMF official said today.
Tourre, 31, joined Goldman Sachs in 2001 after receiving a bachelor’s degree in mathematics from the Ecole Centrale Paris, one of France’s top engineering schools.