Feds Launch Criminal Probe Into Goldman

Goldman Sachs chairman and chief executive officer Lloyd Blankfein testifies before the Senate Subcommittee on Investigations hearing on Wall Street investment banks and the financial crisis on Capitol Hill in Washington, April 27, 2010. (AP Photo/Charles Dharapak)
AP Photo/Charles Dharapak
Last updated at 10:04 p.m. EST

The U.S. attorney's office in Manhattan is conducting a criminal investigation of Goldman Sachs over mortgage securities deals the big Wall Street firm arranged, a knowledgeable person said Thursday.

The person said the probe stems from a criminal referral by the Securities and Exchange Commission. The source spoke on condition of anonymity because the inquiry is in a preliminary phase. The SEC earlier this month filed civil fraud charges against Goldman and a trader in connection with the transactions, alleging it misled investors by failing to tell them the subprime mortgage securities had been chosen with help from a Goldman hedge fund client that was betting the investments would fail.

News of the action came a day after a group of 62 House lawmakers, including Judiciary Committee Chairman John Conyers, D-Mich., asked Justice to conduct a criminal probe of Goldman.

SEC spokesman John Nester wouldn't confirm or deny that the agency had made a referral to the Justice Department for a criminal investigation. He declined any comment on the matter, as did Yusill Scribner, a spokeswoman for the U.S. attorney's office in Manhattan.

Goldman spokesman Lucas van Praag said, "Given the recent focus on the firm, we're not surprised by the report of an inquiry. We would cooperate fully with any request for information."

The Wall Street Journal first reported the Justice Department action.

The SEC's suit accuses Goldman Sachs of misleading investors about securities backed by subprime home loans. The agency alleged that Goldman concocted mortgage investments without telling buyers they had been put together with help from a hedge fund client, Paulson & Co., that was betting on the investments to fail.

Goldman disputes the charges and says it will contest them in court.

Goldman executives made their case Tuesday in the court of public opinion, as they appeared before a Senate panel and defended the firm's conduct in the run-up to the financial crisis. Goldman CEO Lloyd Blankfein told skeptical senators that clients who bought mortgage securities from the firm in 2006 and 2007 came looking for risk "and that's what they got."

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Blankfein was the final witness in Tuesday's hearing on Goldman's conduct before the financial near-meltdown that turned into the worst recession since the Great Depression. The Securities and Exchange Commission has said there was no connection between the timing of the agency's fraud charges against Goldman Sachs and efforts in the Senate to speed passage of sweeping legislation overhauling financial regulation.