Goldman Sachs subpoenaed

June 2, 2011

A prosecutor in New York has subpoenaed Wall Street powerhouse Goldman Sachs for information related to the financial crisis, a person familiar with the development said Thursday.

The broad request from the Manhattan district attorney, issued last month, stems from an April report by Senate investigators that accused Goldman Sachs of abusive behavior, according to the source.

The report said Goldman Sachs contributed to the financial crisis, partly by designing mortgage-related investments that enabled the firm to profit while its clients lost money.

“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,” Goldman Sachs said in a statement Thursday.

A spokeswoman for District Attorney Cyrus R. Vance Jr., Erin M. Duggan, declined to comment, saying the prosecutor’s office does not confirm whether matters are under investigation.

The existence of the subpoena was first reported by Bloomberg.

The person who described the subpoena spoke on the condition of anonymity because the investigative step was taken confidentially.

Almost three years after the financial system teetered on the brink of collapse, crippled by toxic mortgages, the request from the district attorney’s office was a tangible sign that Wall Street’s role in the crisis remains under official scrutiny.

The Senate Permanent Subcommittee on Investigations, which produced the April report, recommended that regulators review its findings for any violations of law.

At a hearing last month, House Judiciary Committee member Zoe Lofgren (D-Calif.) complained about “the lack of Wall Street prosecutions,” and asked what the department was doing about “the bandits on Wall Street who brought the nation and the world to the brink of financial disaster.”

In response, U.S. Attorney General Eric H. Holder Jr. told lawmakers that his department was “looking right now at the report prepared by Senator [Carl] Levin’s subcommittee that deals with Goldman Sachs.”

Goldman Sachs last year agreed to pay $550 million to settle Securities and Exchange Commission charges that it misled investors about an investment package tied to subprime mortgages. The firm failed to disclose that a big hedge fund, Paulson & Co., helped select the loans included in the package even as it was betting against them.

Investors in the collateralized debt obligation (CDO), known as “Abacus 2007-AC1,” lost more than $1 billion, while Paulson made about $1 billion, the SEC said.

The Senate report, issued by Levin (D-Mich.), the subcommittee chairman, and ranking member Tom Coburn (R-Okla.), alleged a broader pattern of abusive conduct.

Amid the downturn in the mortgage market in 2007, Goldman sold mortgage-related investments without disclosing to buyers that it was betting against the subprime market and stood to gain if some of the same securities being sold were to lose value, the report said.

At times, Goldman minted CDOs “using assets that it believed were of poor quality and would lose money,” selling them “at higher prices than it believed they were worth,” the report said.

The arrangements “created multiple conflicts of interest” and placed Goldman’s interests ahead of its clients’, the report said.

For example, the report said, Goldman selected the assets for a $2 billion CDO known as “Hudson 1” to transfer subprime mortgage risk off its books. A marketing document said the firm “had aligned incentives with the Hudson program by investing in a portion of the equity,” the report said.

But the marketing document didn’t reveal that Goldman’s $6 million investment on the same side as Hudson buyers was outweighed many times over by Goldman’s $2 billion “short position,” which put the firm’s interests at odds with those of Hudson’s investors, the report said.

The marketing booklet said Hudson’s assets were “sourced from the Street,” creating the false impression that they they came from other firms, the report said. In interviews with the subcommittee, Goldman personnel said it was accurate to describe the assets as “sourced from the Street” because Goldman was part of “the Street,” the report said.

“While we disagree with many of the conclusions of the report, we take seriously the issues explored by the subcommittee,” Goldman said in a April response.

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