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Justice probe of Goldman goes beyond deals cited by SEC
But law enforcement sources said the probe by the Manhattan U.S. attorney's office -- which is known for aggressively investigating financial fraud cases -- was not based on an SEC referral and was underway before the SEC announced the civil case April 16.
High legal threshold
The Justice Department typically investigates high-profile cases of securities fraud, but the threshold for criminal prosecution is significantly higher than that of civil cases, and such investigations are highly complex.
The threat of criminal prosecution can doom a business. A criminal case ruined the Wall Street firm Drexel Burnham Lambert in the 1980s even though it settled.
The SEC says Goldman and employee Fabrice Tourre broke the law and committed fraud when they sold clients a complex investment linked to the value of home loans that was secretly designed to fail. Another firm, Paulson & Co., a hedge fund, helped Goldman create the investment and planned to bet against it. The SEC says the relationship was not disclosed to Goldman's clients, ACA Financial Guaranty and the German bank IKB.
Goldman and Tourre have denied any wrongdoing. Goldman says that ACA and IKB were sophisticated investors and that disclosure of Paulson's role was not required.
The Justice Department suffered a setback last year with the failure of the first major criminal case to arise from the financial crisis: the prosecution of two Bear Stearns hedge fund managers. A jury rejected securities fraud charges against the hedge fund managers, who ran funds linked to subprime mortgages, after presenting evidence that the men knew about risks but did not disclose these to investors.
The cases against Bear Stearns and Goldman Sachs have some overlap. One of the subprime-linked securities that contributed to the collapse of the Bear Stearns hedge funds was assembled by Goldman and sold under its Abacus program, which was the subject of the SEC suit and the Senate report this week.
Securities lawyers have said that the Bear Stearns case sent a chilling message to the Justice Department after jurors said the prosecution's evidence, drawn in large part from internal company e-mails, was not persuasive. Lawyers said the Justice Department would need a very strong case to defeat Goldman.
They also said the criminal probe could complicate the SEC case as it moves to trial. Facing criminal prosecution, Goldman employees might decline to testify and then invoke the Fifth Amendment if the SEC seeks new depositions for the trial, as is common.
However, in a civil case, unlike in a criminal case, invoking the Fifth Amendment can be held against you by a judge or jury.
Staff writer Tomoeh Murakami Tse in New York contributed to this report.