Goldman Case Is Likely Tip of the Legal Iceberg
Shareholder suits, criminal indictments likely after fraud allegations
WASHINGTON - The fraud charges against Goldman
Sachs & Co. that rocked financial markets Friday are no slam dunk,
as hazy evidence and strategic pitfalls could easily trip up government
Yet that hardly matters, experts
say, because the allegations will kick off a new era of litigation that
could entangle Goldman and other banks for years to come.
charges against Goldman relate to a complex investment tied to the
performance of pools of risky mortgages. In a complaint filed Friday,
the Securities and Exchange Commission alleged that Goldman marketed
the package to investors without disclosing a major conflict of
interest: The pools were picked by another client, a prominent hedge
fund that was betting the housing bubble would burst.
said the charges are "unfounded in law and fact." In a written response
to the charges, the bank said it had provided "extensive disclosure" to
investors and that the largest investor had selected the portfolio -
not the hedge fund client. Goldman said it lost $90 million on the deal.
doesn't contradict the SEC complaint, which says the largest investor
selected the mortgage investments from a list provided by the hedge
fund. And the fact that Goldman lost money has no impact on the fraud
The charges will unleash a torrent
of lawsuits, and likely signal that the government is prepared to file
more lawsuits related to the overheated market that preceded the
financial crisis, experts said.
just the tip of the iceberg," said James Hackney, a professor at
Northeastern University School of Law. "There are a lot of folks out
there in different deals who played similar roles, and once it starts
building steam, plaintiffs' lawyers will figure out this is where the
money is and there should be a lot of action."
Among the legal action expected in the coming months:
suits by Goldman shareholders who believe Goldman alleged misconduct
made their stakes less valuable could come as early as Monday. Such
suits are common when companies are accused of wrongdoing. Goldman
shares fell almost 13 percent Friday as the bank lost $12.5 billion in
who believe Goldman sold them on deals that were doomed to fail. The
investors in the transaction at the heart of the SEC case could sue
first, followed by others who believe their losses were similar.
criminal charges, if the SEC's civil case reveals evidence that meets
the higher standard of "proof beyond a reasonable doubt." Experts said
it's unlikely the company as a whole will face criminal charges, but
evidence could emerge that would expose the Goldman executive named in
the SEC complaint, 31-year-old Fabrice Tourre, to criminal prosecution.
by regulators about other mortgage investments at Goldman and
elsewhere. SEC enforcement chief Robert Khuzami told reporters Friday
the agency is racking up evidence on other deals in the overheated
market that preceded the financial crisis.
the case has provoked legal questions from foreign governments,
according to published reports. That's because the financial crisis
forced many countries to bail out banks that lost money on investments
arranged by Goldman.
German regulators are
considering legal action against Goldman, newspaper Welt am Sonntag
reported, quoting a spokesman for Chancellor Angela Merkel.
charges would be on behalf of IKB Deutsche Industriebank AG - an early
victim of the financial crisis that was rescued by the state-owned KfW
development bank among others. IKB invested in the deal regulators are
flurry of legal activity is likely to proceed separately from the SEC's
case against Goldman, which experts said faces numerous pitfalls.
prove its fraud case against Goldman, the government must show that
Goldman misled investors or failed to tell them facts that would have
affected their financial decisions.
government's greatest challenge, experts said, will be boiling the case
down to a simple matter of fraud. The issues involved are so complex
that Goldman may be able to introduce enough complicating factors to
shed some doubt on the government's claims.
you wanted to go after Goldman with a complaint that wouldn't stick,
this would be perfect," said Janet Tavakoli, president of Tavakoli
Structured Finance, a Chicago consulting firm. "If you look at these
products, almost all of them look like hoaxes because of the junk
Legal experts pointed to the
paucity of evidence in the government's lawsuit, which contains short
excerpts from e-mails but lacks key information about what the various
investors knew and what actions they took.
quality of the evidence was not clear from the complaint, said Jacob
Frenkel, a former SEC enforcement lawyer now with Shulman, Rogers,
Gandal, Pordy & Ecker PA.
there's been an uptick in "cases where the government chooses select
excerpts from e-mails as the basis for its allegations only to find the
balance of the text or other e-mails prove otherwise."
example, prosecutors last fall tried unsuccessfully to use a series of
e-mails to convict two Bear Stearns hedge fund executives. They wanted
to convince jurors that there was behind-the-scenes alarm at the hedge
funds as investments in complex securities tied to mortgages began to
The jurors were not swayed. After
the verdict, some jurors told reporters they found the evidence against
the two executives flimsy and contradictory. Others suggested the pair
were being blamed for market forces beyond their control.
already has advanced a similar argument. "Any investor losses result
from the overall negative performance of the entire sector, not because
of which particular securities" were in the investment pool, the bank
said in a written response to the charges Friday.
part of a time-honored tradition of defusing accusations by bringing in
details that may or may not be relevant, said James Cohen, a professor
at Fordham University School of Law.
it's in the interest of the party that has Goldman's role to muddy the
waters - it's rarely in their interest to have the picture as sharp as
HDTV," Cohen said.
legal experts suggested Goldman and the SEC had reached an impasse over
a settlement before the charges were announced. They speculated that
Goldman was unwilling to admit that it allowed the hedge fund to create
a portfolio of securities that was designed to fail because that
admission could do irreparable harm to Goldman's reputation.
could've easily paid a fine already," said John Coffee, a securities
law professor at Columbia University. "So I don't think it's money
they're fighting over."
The case has been
assigned to U.S. District Judge Barbara Jones of New York. Jones is the
federal judge who five years ago presided over the $11 billion criminal
fraud case that toppled WorldCom Corp. and sent its former CEO Bernard
Ebbers to prison for 25 years.