Along with SEC, other investigators and suits may target Goldman Sachs

As investigators in Massachusetts considered charging Wall Street firms for their role in the financial collapse, they focused on Goldman Sachs because it had bundled and sold the shoddiest of subprime mortgage loans, setting up the housing market for a greater fall by continuing to sell shaky securities even as other banks withdrew.

After discussions with the office of state Attorney General Martha Coakley (D), Goldman last year agreed to pay up to $60 million to end that investigation, the first major settlement involving Wall Street's role in the subprime mortgage crisis.

"Goldman was particularly active with respect to facilitating the lending by two of the more notorious and unsound subprime lenders -- Fremont and New Century," Coakley said Wednesday. "Goldman was especially active with these companies in the latter stages of the subprime lending boom . . . when it should have been increasingly clear to any responsible person that the subprime loan pools underlying securitizations suffered serious problems."

Even before the Securities and Exchange Commission sued Goldman last week, accusing it of creating a complex financial product designed to fail and selling it to unknowing investors, the firm had become a frequent target of investigators. In courts and in Congress, Goldman has been accused of a range of misdeeds, including manipulating oil prices and using taxpayer money for handsome bonuses.

The company has maintained that it did nothing improper in any of those cases. In the Massachusetts settlement, it admitted to no wrongdoing, and a spokesman said Goldman was never a leading issuer or underwriter of residential mortgage-backed securities. Yet, to many Goldman critics, the SEC lawsuit underscores their worst image of the firm as a cold bank that places its profit before anything else -- client interests, customer needs and its obligation to society as a leading American corporation.

Although Goldman quickly agreed to settle the Massachusetts case, it is gearing up for a court battle with the SEC. The case, analysts said, challenges the heart of Goldman's motto -- "Our clients' interests always come first" -- and could set off a new wave of lawsuits against the firm.

"Anyone who's ever done any investment through Goldman who's lost a significant amount of money all the sudden starts to say, 'Gee, I wonder if there was something else out there that they were doing, which they didn't tell me about, which would have made me not want to invest?' " said Richard L. Scheff, chairman of the law firm Montgomery, McCracken, Walker & Rhoads. "If I'm a person who's lost money, why would I think it's limited to this? You're talking about someone's duty to their clients. That's the principle at issue here."

Opening argument

The SEC case adds to a series of recent legal challenges. In 2008, Goldman agreed to pay tens of millions of dollars to settle allegations by the New York state attorney general, who argued that it misled investors about the safety of instruments known as auction-rate securities. Last year, several pension funds sued, charging the company's directors with breach of duty in connection with outsize executive paydays; Goldman has said the suits lack merit.

Massachusetts Secretary of State William Galvin said Wednesday that he has been looking into whether weekly meetings held by Goldman's traders and securities analysts -- known within the firm as "huddles" -- violated any laws. Federal authorities are also looking into the matter, first reported in the Wall Street Journal, which includes allegations that tips shared in the meeting then go to favored clients.

"The ultimate need of the company to show profit trumps the rights of customers," Galvin said. "And that's our problem. And that's a recurring theme." Goldman declined to comment.

In Washington, pressure is also growing. Reps. Elijah E. Cummings (D-Md.) and Peter A. DeFazio (D-Ore.) urged the SEC this week to widen its investigation to include securities underwritten by Goldman and backed by American International Group, the insurer that received a massive federal bailout. "Should any of these transactions be found to include fraudulent conduct, any resulting contractual payments from AIG-issued credit-default swaps could be viewed as ill-gotten gains," the lawmakers wrote in a letter to SEC Chairman Mary Schapiro.

Next week, Fabrice Tourre, the 31-year-old Goldman banker at the center of the SEC's case against the firm, is set to testify before the Senate's permanent subcommittee on investigations along with his boss, chief executive Lloyd Blankfein, according to sources who spoke on the condition of anonymity because they were not authorized to discuss the matter publicly.

Although Blankfein's appearance before the panel was scheduled before the SEC filed its lawsuit, Tourre has agreed to testify as well, according to one of the sources. The hearing was to discuss Goldman's role in the mortgage crisis, but most of the questions are now expected to focus on the civil fraud lawsuit.

Tourre was deregistered to work as a trader in London on Tuesday. A Goldman spokesman said the firm filed papers to strip his license with British regulators because he had voluntarily decided to take an extended leave. Goldman said the decision was made without pressure from British regulators, who have launched a formal investigation into Goldman's practices. The firm has repeatedly said Tourre did nothing wrong.

To help it cope with scrutiny, Goldman has hired a former White House counsel, Gregory B. Craig, to advise it on litigation and related matters. A White House official said the administration was surprised to learn about Craig's new assignment, but Craig, now with the law firm Skadden Arps, said he was acting as a lawyer for Goldman, not a lobbyist.

(Published by The Washington Post - April 22, 2010)