Goldman Better Be Taking Subpoena Threat Seriously

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Not much is known about a subpoena that's been issued to Goldman Sachs (GS) by the Manhattan District Attorney's office related to the investment banking giant's role in the recent financial meltdown.

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Is Goldman facing a criminal investigation? If so, are prosecutors targeting the entire firm for possible indictments or focusing on individual executives? And what would a criminal investigation, let alone indictments, mean to the future of the iconic firm?

Who knows?

One thing is fairly certain, however. Goldman, arguably one of the most powerful companies in the world, better be taking it very seriously.

Goldman's attorneys are undoubtedly knocking down the doors at the District Attorney's office in an effort to find out exactly what the prosecutors are trying to determine, said Jonathan New, himself a former prosecutor and now a criminal defense lawyer at Baker Hostetler in New York.

New said it's too early to predict with any accuracy what all of this will mean for Goldman.

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The investigation may end up going nowhere, he said. But anytime a large financial institution is subpoenaed by a prosecutor it's a serious incident for that institution. They can't ignore it.

Financial markets certainly aren't. Goldman's shares were down more than $3 in early trading Thursday after news of the subpoena broke. They had recovered a bit toward midday. And the shares are down nearly 20% since April when a Senate committee released a damning report that accused Goldman of playing a leading role in bringing about the recent financial crisis.

The report, based on an investigation spearheaded by Michigan Democrat Carl Levin, accused the firm broadly of turning a blind eye to the looming financial crisis as it filled its own coffers, often at the expense of its own clients.

Specifically, Goldman stands accused of misleading investors about mortgage-backed securities sold by the firm. According to the accusations, while Goldman was touting these securities as solid investments they were secretly shorting the housing sector in the belief the subprime mortgage market was ready to collapse.

The subpoena is reportedly tied to the allegations contained in that report. (FOX Business' Charlie Gasparino reported that Goldman also expects to receive a subpoena from the Department of Justice, perhaps as soon as today.

New said a criminal indictment can be a death blow for a company, especially a publicly traded one. Even if the company is ultimately exonerated, the stigma of an indictment is enough to send many investors out the door, he said. That's even more true for investment banks, which are so heavily dependent on their relationships with clients. 

With those considerations in mind, prosecutors tend to tread carefully when they are considering indictments, the attorney said.

At least one influential Wall Street analyst agrees with New's assessment.

Brad Hintz, an analyst at Sanford D. Bernstein & Co., issued a report on Wednesday suggesting that prosecutors will steer clear of criminal charges against Goldman because the firm's health is vital to U.S. financial stability.

Given the consequences of previous criminal indictments against financial institutions, we believe that officials within the Beltway know that now is not the time to 'stress test' the major banks and put the global economy in play with a Goldman Sachs show trial, Hintz wrote.

The analyst said a worst-case scenario for a "too big to fail" bank such as Goldman would likely involve what's known as a deferred-prosecution agreement that would include a hefty fine and placing a federal monitor within the company.

Hintz believes investors are mistaken if they think Goldman potentially faces the same fate as consulting giant Arthur Andersen, which essentially disappeared after being indicted and convicted early last decade in the Enron scandal. The convictions were later overturned by the Supreme Court.

Hintz explained that, at the federal level at least, prosecutors now tend to lean toward these deferred-prosecution agreements in an effort to avoid throwing the baby out with the bathwater, so to speak.

After the disaster of Arthur Andersen, the Justice Department has chosen to treat most companies facing criminal indictments like juvenile offenders, that can be 'rehabilitated' with Federal supervision, he wrote.

In recent years, AIG (AIG), America Online (AOL), Boeing (NYSE>BA), Bristol-Myers Squibb (BMY), Health-South, KPMG, MCI, Merrill Lynch and British Petroleum (BP) have at one time or another operated under deferred-prosecution agreements, the analyst noted.

But Goldman's subpoena didn't come from the Justice Department, it came from a local prosecutor, and that may be significant.

I think the district attorney in New York is willing to do what the Department of Justice has so far been unwilling to do, said Chicago-based securities lawyer Andrew Stoltmann. What the DOJ has been unwilling to do, according to Stoltmann, is go on a fishing expedition based on the Senate committee's report, which the attorney believes provides a pretty clear road map for the three major things Goldman Sachs did.

If in fact New York prosecutors are basing their investigation on the Senate report, than Stoltmann says possible charges could include: securities fraud for not disclosing to clients that Goldman was shorting securities the firm was also touting; illegal market manipulation in an effort to artificially depress the prices of securities Goldman wanted to buy; and obstruction charges against Goldman CEO Lloyd Blankfein for possibly lying to Congress during an often-testy hearing with Levin's committee in April 2010.

Stoltmann isn't worried about Goldman being too big to fail. To the contrary.

A potential indictment of Goldman Sachs will go an extraordinarily long way in deterring the same sort of conduct by financial institutions that almost melted down the worldwide economy, he said.

Stoltmann predicted a criminal indictment against either the firm or one of its top executives within the next six months.

We don't comment on specific regulatory or legal issues, but subpoenas are a normal part of the information request process and, of course, when we receive them we cooperate fully, a Goldman spokesman said.

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