U.S. Won’t Prosecute Goldman Sachs, Employees Over CDO Deals

Goldman Sachs Group Inc. CEO Lloyd C. Blankfein
Goldman Sachs Group Inc. Chief Executive Officer Lloyd C. Blankfein said in his testimony that the firm never bet against its clients for its own profit. Photographer: Scott Eells/Bloomberg

The U.S. Justice Department won’t pursue criminal charges against Goldman Sachs Group Inc. or its employees for allegedly concealing that the bank bet against mortgage-related securities that it sold to investors.

The Justice Department, along with the U.S. attorney’s office for the Southern District of New York, reviewed the possibility of prosecution after the Goldman Sachs deals were faulted in a Senate investigative panel’s report last year.

Prosecutors “determined that, based on the law and evidence as they exist at this time, there is not a viable basis to bring a criminal prosecution with respect to Goldman Sachs or its employees in regard to the allegations set forth in the report,” the Justice Department said yesterday in a statement.

The Senate’s Permanent Subcommittee on Investigations concluded in April 2011 that Goldman Sachs had peddled the securities to its clients while failing to disclose that the firm had bet that those instruments would lose value. The investigation pinned much of the blame for the credit crisis on Wall Street banks that earned billions of dollars by enticing clients to buy the risky bonds.

Senators Carl Levin of Michigan and Tom Coburn of Oklahoma, the panel’s Democratic chairman and senior Republican, referred the report to the Justice Department to see whether criminal charges were merited.

“We are pleased that this matter is behind us,” David Wells, a spokesman for the New York-based bank, said in a statement yesterday.

Blankfein Testimony

The financial-crisis inquiry was the subcommittee’s longest probe under Levin, lasting two years by the time the panel completed its work. The staff amassed 56 million pages of memos, documents, prospectuses and e-mails, Levin said last year.

As part of the investigation, Levin brought seven current and former Goldman Sachs executives, including Chief Executive Officer Lloyd Blankfein and Chief Operating Officer Gary D. Cohn, before the panel for questioning about their actions before the 2008 financial crisis.

Blankfein said in his testimony that the firm never bet against its clients for its own profit.

When the panel’s 640-page report was released, Levin said he wanted the Justice Department and the Securities and Exchange Commission to examine whether Goldman Sachs broke the law by misleading clients who bought the complex securities, known as collateralized debt obligations, without knowing the firm would benefit if they fell in value.

‘Deceptive and Immoral’

“Its actions did immense harm to its clients, and helped create the financial crisis that nearly plunged us into a second Great Depression,” Levin said in a statement today. “Whether the decision by the Department of Justice is the product of weak laws or weak enforcement, Goldman Sachs’ actions were deceptive and immoral.”

Levin said in the statement the regulators implementing the 2010 Dodd-Frank Act, the financial-overhaul law responding to the credit crisis, must resist efforts to weaken regulations and enforce them strongly.

A separate SEC lawsuit in April 2010, accusing Goldman Sachs of misleading investors in the sale of securities that bet on subprime mortgages, caused the company’s stock to plunge 13 percent on the day it was filed and roiled the broader market. The investment bank paid $550 million to settle the case in July that year, saying it had made a “mistake” in omitting disclosures.

‘Exhaustive Review’

The Justice Department said yesterday it conducted “an exhaustive review of the report and its exhibits, independently gathered and scrutinized a large volume of other documents and tenaciously pursued potential evidentiary leads, including conducting numerous witness interviews.”

“If any additional or new evidence emerges, today’s assessment does not prevent the department from reviewing such evidence and making a different determination, if warranted,” the department said.

The government’s announcement came the same day that Goldman Sachs disclosed that U.S. regulators had decided against filing suit against the firm over its role in selling $1.3 billion of mortgage-backed securities. The decision by the SEC marked a reversal of course for the agency after its investigators warned in February that they intended to recommend legal action.

SEC lawyers told Goldman Sachs on Aug. 6 that they no longer planned to pursue claims against the bank, the company said yesterday in a regulatory filing. The regulator had sent Goldman Sachs a so-called Wells notice in February, which typically gives recipients a chance to dissuade investigators from recommending the agency authorize enforcement action.

After gaining 1.1 percent yesterday, Goldman Sachs today fell 1.3 percent by 2:30 p.m. to $102.26 in New York Stock Exchange composite trading.

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