Clients prepare to sever Goldman ties

Margareta Pagano,Business Editor
Saturday 22 October 2011 22:24

Capricorn Investment Group, one of the world's biggest family offices, could break its relationship with Goldman Sachs following accusations by the US financial watchdog that the firm misled clients over mortgage trading.

The California-based firm is the first big client known to be reviewing ties with the investment bank in the wake of the fraud allegations which stunned the financial world, but dozens of others are said to be considering their relationship.

Capricorn, headed by Stephen George, a former Goldman banker, manages around $7bn for its high-profile investors, which include the former US vice-president, Al Gore. The firm's executives are understood to be so angry with Goldman that they are deciding whether to continue using the firm for business transactions.

A spokeswoman, talking from Palo Alto, said that the firm never comments, either on its banks or its clients. One source close to the firm, which was founded by billionaire Jeffrey Skoll, former president of eBay and an executive producer of An Inconvenient Truth, Mr Gore's Oscar winning film on climate change, said the final straw had been watching the testimony of Goldman's top executives at last week's Senate investigation. Goldman's chief executive, Lloyd Blankfein, and six other past and present executives were grilled by the sub-committee which accused the firm's executives of acting greedily and unethically.

The source said: "It was deeply depressing to watch. What we can't understand is why Goldman doesn't issue a proper apology. The bank needs to show the world, and its clients, that it understands that things went wrong."

Capricorn, which employs 30 people worldwide, specialises in selecting private funds for clients and invests in makers of environmentally and sustainable products. According to filings in the US this year, Mr Gore invested around $35m in hedge funds and private partnerships such as Capricorn.

Another US source said yesterday: "There are many, many other Goldman clients looking at their relationships and some have already decided not to give any more new mandates."

Since the SEC's surprise decision to launch its $1bn civil fraud case against Goldman, the firm's executives have mobilised all its most senior directors to launch a robust defence of its reputation and behaviour in the alleged mortgage securities fraud case. Goldman has vigorously denied any wrong-doing and is intent on clearing its name.

A spokesman said on Friday: "We are doing what we can to talk to all our clients, explaining to them what we did and the exact nature of what happened. One of the problems has been that many of these instruments are very complex."

The SEC claims that Goldman, and its employee Fabrice Tourre, broke the law and committed fraud by selling clients a complex investment linked to the value of mortgage loans which were secretly designed to fail. Central to the case is the role of Paulson & Co, a hedge fund, which helped Goldman create the investment vehicle, Abacus, and which planned to bet against it by shorting the securities. The SEC claims this relationship was not disclosed to its clients, ACA Financial Guaranty and IKB, the German bank. But Goldman says it did tell ACA, although as a market-maker it did not need to give details of Paulson's position.

In a new move on Friday, the US Justice Department said it is studying whether to launch a criminal investigation into the mortgage securities fraud. Goldman added that it would co-operate with any request from the department.

Under civil law, the SEC does not need to prove that Goldman set out to defraud investors but only that it did mislead them. However, under criminal law, the prosecutors would have to prove that Goldman planned to mislead.

Any hopes that Goldman could settle the case appear to have receded as politicians are unlikely to want any settlement ahead of President Obama's attempt to push his financial regulatory reform through Congress.

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