New York prosecutors have asked Goldman Sachs to explain its behavior in the run-up to the financial crisis, the latest investigation that has cast a pall over the reputation of the largest U.S. investment bank.
Goldman Sachs Group Inc now faces probes by several government authorities into derivatives trades it executed in late 2006 and 2007. On Thursday, sources close to the matter said Goldman received a subpoena from the Manhattan district attorney, who joins the Justice Department and the Securities and Exchange Commission in examining Goldman's actions.
Separately, New York Attorney General Eric Schneiderman is investigating Goldman as part of a broader probe into the mortgage operations and securitization practices of seven banks. A source familiar with the situation said Schneiderman's office met Goldman executives and attorneys in the past two weeks.
The probes follow a scathing report by U.S. lawmakers that cast Goldman as a central villain of the financial crisis and accused it of misleading clients about mortgage-linked securities.
The report by a Senate subcommittee, headed by Democrat Carl Levin, said Goldman offloaded much of its subprime mortgage exposure to unsuspecting clients as the market for such securities was starting to tank. In some cases, the bank dragged its heels when clients wanted to get out of their losing positions, according to the report.
The investigations do not imply the bank or its top executives will face criminal or civil charges, but they display a growing interest by prosecutors to build a case against Goldman, legal experts said.
They have subpoena power to get certain records, correspondence, emails and they're trying to find out every last detail that could prove fraud, said Peter Berlin, an attorney who represents defendants in white-collar cases.
The U.S. Department of Justice is also likely to subpoena the bank, The Wall Street Journal reported recently.
The Manhattan district attorney, Cyrus Vance, is not seeking new documents, according to one source, but wants to ask further questions about the information contained in the Levin report.
Vance, the son of former U.S. secretary of state Cyrus R. Vance, said earlier this year he wanted to use a far-reaching 1921 law called the Martin Act to toughen penalties for securities fraud.
The state attorney general's probe is largely being conducted under that statute, according to the source familiar with that case. The state can seek civil or criminal charges, while the Manhattan D.A. can only pursue criminal charges, potentially making its burden of proof more difficult.
Still, the Manhattan D.A.'s office has used the Martin Law to crack down on white-collar crime in the past. High-profile cases the office prosecuted using the Martin Act include brokerage firm A.R. Baron & Co and ex-Tyco chief Dennis Kozlowski.
In a statement, Goldman said: We don't comment on specific regulatory or legal issues, but subpoenas are a normal part of the information request process and, of course, when we receive them we cooperate fully.
Both Levin's and Vance's offices declined comment on Thursday.
The probes into the behavior of Goldman and some of its peers signal increasing determination by U.S. government agencies to investigate the actions of banks in the years leading up to the financial crisis and to determine whether misdeeds by executives made the meltdown worse.
One of the first big cases was the Securities and Exchange Commission's civil fraud suit against Goldman last year over the bank's failure to disclose information linked to a complex mortgage security. Goldman settled those charges in July without admitting or denying guilt, but it did express regret for failing to disclose information.
Goldman's shares fell as much as 3.4 percent as news of the subpoena emerged on Thursday, but then took back much of their losses and closed 1.3 percent down at $134.38. The stock has been declining since January, but its sell-off has accelerated since the release of the Levin report and it is now approaching its 52-week low of $129.50.
Even if there is a low likelihood of successful civil or criminal action against Goldman Sachs, continued pressure from politicians and the public could still hurt the firm, Sanford Bernstein analyst Brad Hintz wrote in a note on Wednesday.
We believe that Goldman's clients will begin to rethink their relationship with the firm and the franchise will ultimately suffer, Hintz wrote, adding the bank would be wise to make amends with the public soon.
But other veteran analysts said recently that concerns about the Goldman investigations are overblown and little will likely come from them.
JPMorgan analyst Kian Abouhossein raised his rating on the bank to overweight from neutral earlier this week and said possible negative news is already reflected in the bank's share price.
However, some investors take a more negative view.
When the government has you in its cross-hairs, it takes forever to get out of it, said Matt McCormick, portfolio manager at Cincinnati-based Bahl & Gaynor Investment Counsel.
Shareholders need to understand, this is going to be an ongoing risk for years.
(Reporting by Lauren Tara LaCapra; additional reporting by David Gaffen, Maria Aspan; editing by Dan Wilchins, John Wallace, Matthew Lewis and Andre Grenon)