WASHINGTON – Shares of Goldman Sachs Group Inc. plunged 9 percent Friday after word that the Justice Department had opened a criminal investigation of the Wall Street powerhouse over mortgage securities deals it arranged.
The criminal inquiry follows civil fraud charges filed by the government against Goldman two weeks ago and as Congress pushes toward enacting sweeping legislation aimed at preventing another near-meltdown of the financial system.
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The investigation by the U.S. attorney’s office in Manhattan stems from a criminal referral by the Securities and Exchange Commission, a knowledgeable person said Thursday. The person spoke on condition of anonymity because the inquiry is in a preliminary phase.
The SEC brought civil fraud charges against Goldman and a trader in connection with the transactions in 2006 and 2007. The agency alleged the firm misled investors by failing to tell them the subprime mortgage securities had been chosen with help from a Goldman hedge fund client, Paulson & Co., that was betting the investments would fail. Goldman and the trader, Fabrice Tourre, have denied wrongdoing and said they will contest the allegations in court.
Word of the Justice Department action came two days after Goldman executives were grilled and publicly rebuked by senators at a politically charged hearing. And it arrived a day after a group of 62 House lawmakers, including Judiciary Committee Chairman John Conyers, D-Mich., asked Attorney General Eric Holder to order a criminal probe of Goldman.
“This is welcome news indeed,” Rep. Marcy Kaptur, D-Ohio, said. “The American people deserve justice in the matter of Wall Street banks. Federal authorities should leave no rock unturned as they root out any potential fraud that triggered the crisis and caused thousands of families to lose their savings and their homes.”
A related online petition drive organized by liberal groups claimed to have amassed 140,000 signatures.
SEC spokesman John Nester declined any comment on the matter, as did Yusill Scribner, a spokeswoman for the U.S. attorney’s office in Manhattan.
Lucas van Praag of Goldman said, “Given the recent focus on the firm, we’re not surprised by the report of an inquiry. We would cooperate fully.”
Following news of the probe, Standard & Poor’s Equity Research analysts downgraded Goldman’s shares to “Sell” from “Hold” and lowered their target price by $40 to $140.
Investors took a pessimistic view of the downgrade as well as the federal prosecutors’ probe, notwithstanding that it is far from certain that the inquiry will result in criminal charges being brought. Goldman’s stock fell $14.64, or 9.1 percent, to $145.60 in afternoon trading. The stock is down 21 percent since the SEC sued Goldman on April 16. The shares tumbled 13 percent that day but had recovered slightly in recent trading.
The Justice Department move was the latest in a dramatic series of turns in the Goldman saga, which has pitted the culture of Wall Street against angry lawmakers in an election year, in the wake of the financial crisis that plunged the country into the most severe recession since the Great Depression.
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