Goldman Sachs faces possible criminal investigation after SEC charges

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The Independent Online

Goldman Sachs' troubles appeared to be deepening yesterday amid a string of reports that it is now facing a criminal fraud investigation.

The firm has been reeling for the past two weeks after the decision by the US Securities & Exchange Commission to lodge fraud charges against the firm. The SEC alleges that Goldman failed to inform investors in its Abacus bond that a hedge fund helped to pick the portfolio of credit it contained and then bet against it.

In a conference call to discuss the charges, the SEC pointedly refused to deny that the US Department of Justice was involved in the Goldman investigation, although US prosecutors continued to say yesterday that they would neither "confirm nor deny" any investigation.

In a statement Goldman said: " Given the recent focus on the firm, we are not surprised by the report of an inquiry. We would fully co-operate with any requests for information."

Shares in the investment bank dropped by more than 5 per cent in early trading in New York when reports of the investigation emerged.

According to the reports, the investigation is being run from the US Attorney's office in New York, which usually handles Wall Street cases.

To file charges, prosecutors would have to be able to produce evidence that company employees broke the law. Finding such evidence would be harder than the challenge faced by the SEC in pursuing its civil action.

Pressure has nonetheless been mounting on the US authorities to launch a criminal inquiry into Goldman's conduct.

Goldman executives faced a grilling this week from a Senate panel where they were criticised for selling and profiting from complex derivatives based on mortgage products that they knew were risky and which critics said added to the spread and scale of the financial crisis.

Many of the questions focused on whether Goldman bet on these products falling in value. This practice is not illegal, but the senators – in common with many of Goldman's army of critics – questioned the morality of such actions.

Goldman's chief executive, Lloyd Blankfein, has angrily denied that his firm has acted improperly. He maintains that the firm simply gave its clients what they wanted – exposure to the housing market.

The bank says it lost money on the Abacus product and has argued that its bets on the mortgage market generally were about responsible risk management.

Fabrice Tourre, the London-based bond trader named in the civil fraud case against the bank, and one of the people who helped to devise Abacus, said he too "categorically" denied the SEC's charges. Goldman has so far stood by Mr Tourre.