Goldman Sachs Group subpoenaed for precrisis activities

NEW YORK -- Goldman Sachs Group Inc. was subpoenaed by the Manhattan district attorney's office over the investment bank's activities leading up to the financial crisis, a person familiar with the matter said.

Shares of Goldman fell nearly 2 percent to $133.88 a share after Bloomberg News reported earlier Thursday that the bank had been subpoenaed. The stock ended the day down 1.3 percent at $134.38 a share. Goldman's shares are down 20 percent so far this year and are at levels not seen since last July.

Goldman has been watched by lawmakers and regulators since marketing risky investments that bet on the housing market's success just before the mortgage meltdown. Simultaneously the bank reaped billions of dollars from its own bets that the housing market would collapse. Those gains have also made it the target of intense media scrutiny and public outrage.

"This is just another thorn in Goldman's side," says Peter Henning, a professor of law at Wayne State University in Detroit. The government's request for information from Goldman is the first stage of an investigation, but it does not mean the company will necessarily face any charges, Henning says.

The subpoena follows the April release of a 639-page Senate report that showed Goldman had steered investors toward mortgage securities it knew would likely fail.

The report, which was the result of a Senate panel investigation of the financial crisis, found that Goldman marketed four sets of complex mortgage securities to banks and other investors. The report said the firm failed to tell the banks and investors that the securities were very risky, secretly bet against the investors' positions and deceived them about its own positions. The report concluded this was part of Goldman's effort to shift risk from its balance sheet to those of investors'.

Sen. Carl Levin., D-Mich., who heads the panel, said at the time the report was released that he planned to convey findings to the Justice Department and the Securities and Exchange Commission for possible further investigation.

Sen. Levin's spokesman, Bryan Thomas, said the senator had no comment.

One Goldman investor questioned what new material the Manhattan District Attorney might be looking for in its investigation.

"I think the news here is that you really can't tell how much more of this there's going to be. Did the SEC settlement eradicate all the termites?" said Michael Farr, president and chief investment officer of the Farr, Miller & Washington investment firm, which owns 60,000 Goldman shares.

Well-known bank analyst Dick Bove cut his rating on Goldman to "sell" shortly after the congressional report was released. He said Thursday that he believes the storied investment bank will continue to endure confrontations from the government "until it shows serious contrition."

Last summer, Goldman agreed to pay $550 million to settle civil fraud charges by the Securities and Exchange Commission of misleading buyers of mortgage-related securities. The agreement applied to one of the four deals cited by the Senate subcommittee.

Goldman acknowledged its marketing materials for the deal at the center of the charges omitted key information for buyers. But the firm did not admit legal wrongdoing.

To date, Goldman also is being investigated by Massachusetts state regulators, the Commodities Futures Trading Commission and the Financial Industry Regulatory Authority, according to Brad Hintz, an analyst at Sanford Bernstein.

Hintz, in a report that came out Wednesday, noted that Goldman has been losing in the court of public opinion. But he believed the firm was too big to be charged criminally because of the strain such a prosecution could put on the financial system and economy.

"Indicting a `too big to fail" financial institution, like Goldman Sachs, is a dangerous undertaking," Hintz said in the report.

A spokeswoman for Manhattan District Attorney Cyrus Vance Jr. said the office had no update regarding Goldman. Goldman spokesman David Wells said the company doesn't comment on specific regulatory or legal issues, but cooperates when it receives a subpoena. A subpoena is a request for information and doesn't mean that a company has done anything wrong.