White Collar and Securities: U.S. Reportedly Opens Investigation of Goldman Sachs

Various news organizations are reporting today that the U.S. Attorney for the Southern District of New York has begun an investigation of Wall Street banking giant Goldman Sachs. The reports state that the investigation resulted from a Securities and Exchange Commission referral of possible criminal activity by the bank. The SEC brought a civil enforcement action against Goldman earlier in the month alleging securities fraud.

The prosecutors will most likely begin their investigation on the basis of facts generated by the SEC investigation. The government will begin by looking to see whether Goldman and its executives defrauded customers who invested in Goldman's CDO offering, ABACUS 2007-AC1. (See prior post for a discussion of the SEC complaint.) There are a number of fraud statutes available to federal prosecutors should they seek indictments. Those most commonly used by federal prosecutors in securities fraud cases are wire fraud, mail fraud, securities fraud, conspiracy, and money laundering.

The criminal investigation will focus more on the potential culpability of individuals rather than the Goldman corporate entity. Typically, federal prosecutors will seek to hold individuals responsible for any criminal wrongdoing rather than settle for corporate liability. In many cases a corporation will enter into a corporate integrity agreement with the government. Such an agreement will require compliance and internal education programs and a period of time in which the company must report regularly to the government. In return for the agreement the government forgoes prosecution of the business entity.

The criminal authorities have more difficult task than the SEC in prevailing in a law suit. For a criminal prosecution to be successful the government must convince the jury beyond a reasonable doubt, a much greater burden than the preponderance of the evidence burden that the SEC must meet in its civil enforcement action.

A potentially important factor to bear in mind is that the SEC did not name John A. Paulson or his hedge fund in its complaint against Goldman. In the press conference announcing the SEC action, the Commission's Director of Enforcement seemed to deflect questions about the charging of the hedge fund. Additionally, when Goldman executives testified before the Permanent Senate Subcommittee on Investigations, there was an absence of questioning about the role of the Paulson hedge fund in creating the CDO offering. One possible explanation for the absence of discussion about Paulson is that persons involved in the hedge fund may be cooperating with the government investigations.

If there are persons involved in the the deal cooperating with investigators, that fact could greatly facilitate the government's investigation and proof of wrongdoing. "Flipping" an insider to a criminal conspiracy is one of the best means of investigating and bringing a successful case against a criminal conspiracy.

For more about the reported federal criminal investigation of Goldman, please see The New York Times, "Goldman's Share Plunge on Inquiries and Downgrades," April 30, 2010, http://www.nytimes.com/2010/05/01/business/01goldman.html?ref=business.