Goldman Sachs shares nosedived nearly 5% after it confirmed that its chief executive, Lloyd Blankfein, has hired Reid Weingarten, a high-profile Washington, D.C., defense attorney to defend the embattled executive in connection with the Department of Justices inquiry into Blankfein and other firm officials.

The Justice probe is looking into findings in a report by the Senate Permanent Subcommittee on Investigations which alleges Goldman Sachs (GS) executives misled Congress and investors about its mortgage-backed securities deals.

Weingartens past clients include a former Agriculture secretary charged with corruption, the top executive of WorldCom, and an Enron accounting officer.

As is common in such situations, Mr. Blankfein and other individuals who were expected to be interviewed in connection with the Justice Departments inquiry into certain matters raised in the PSI

(Senate Permanent Subcommittee on Investigations) report hired counsel at the outset, the firms statement says, which was issued after the news broke that its CEO hired Weingarten, who is with the firm Steptoe & Johnson.

Democratic Sen. Carl Levin of Michigan and Republican Tom Coburn of Oklahoma earlier this year had jointly signed a letter asking Justice and the SEC to examine the Senate panels report, which suggested Goldman Sachs CEO Blankfein lied under oath when he said the firm didnt have a massive short position against the housing market, and that Goldman Sachs misled investors when it didnt disclose to clients that it was betting against securities it was selling to them.

In April 2010 CEO Blankfein testified under oath before the Senate Subcommittee: Much has been said about the supposedly massive short Goldman Sachs had on the U.S. housing market. The fact is we were not consistently or significantly net short the market in residential mortgage-related products in 2007 and 2008&We didnt have a massive short against the housing market and we certainly did not bet against our clients.

Based on evidence in the Senates 635-page report, Senator Levin has said: In my judgment, Goldman clearly misled their clients and they misled Congress.

Meanwhile, an SEC official has already told FOX Business: The SEC is not inhibited from bringing any future action against Goldman Sachs. Goldman is not fully absolved of its sins, if the information shows a case can be brought. The SEC can still come back to Goldman Sachs.

Weingarten will likely do a full court press that Goldman Sachs was not net short mortgage-backed securities (MBS) or housing, even though internal emails and documents released by the Senate panel show firm executives used the term the big short on housing, and that the firm didnt tell investors it was shorting deals it was selling to them, betting they would fail.

Weingarten is known for courtroom theatrics and for attacking opponents' credibility, but he has a mixed track record in securities and accounting cases. Weingarten won an acquittal on charges of securities fraud and grand larceny for client Mark Belnick, former general counsel of Tyco, where former executives Dennis Koslowski and Mark Swartz were found guilty of stealing $150 million from the conglomerate.

Weingarten in recent years took on the case of former Enron accountant Richard Causey, who had pled guilty to one count of securities fraud (attorney Daniel Petrocelli initially represented Causey).

But Weingarten lost securities fraud cases for Bernie Ebbers at WorldCom and Franklin Brown at Rite Aid, who was convicted of 10 counts stemming from accounting irregularities at the drug store chain.  

Questions will arise about Weingartens ability to handle technical details of accounting fraud and securitization cases.

Goldman did use the term "big short" in internal documents. And at least two times in 2007 the firm enacted huge short bets against mortgage-backed securities (MBSs).

It also knew the housing crisis was coming as it slashed through its MBS inventory in 2007 in order to "get rid of cats and dogs" as Blankfein said in an email.

The bank allegedly misled investors in Hudson, Anderson and notably the Timberwolf deals. Timberwolf deal unequivocally shows Goldman betting against clients--it's one key example where Goldman Sachs enacted its "big short.

Worth watching too is how Weingarten will define net short and massive short positions.

In Blankfeins statement to Congress under oath, which will likely be at issue, note the years he citesonly 2007 and 2008, when deals at issue in the Senate report were done in prior years, notably in 2006.

Goldman did have a large short position against housing in 2006 and continuing through 2007, Senate documents show, and 2008 is an interesting year for Blankfein to bring upthat is the year AIG collapsed and was bailed out. Goldman collected about $14 billion in the taxpayer bailout of AIG, an insurance firm it had used to short housing via credit default swaps.

In its quarterly report ending August 2007, Goldman disclosed in the SEC filing that although we recognized significant losses on such our non-prime mortgage loans securities, these losses were more than offset by gains on short mortgage positions.

That helped drive its trading desk results to a big $7.6 billion profit for the quarter, up from $4.4 billion in August 2006. Top bank analyst Guy Moszkowski, then at Merrill Lynch, now part of Bank of America, found at the time that Goldmans trading profits were $1.7 billion higher than Merrill had forecast because of these lucrative short bets.

Sources close to the matter add that the potential charges of lying to Congress may be buoyed by testimony given by Goldman Sachs on a deal dubbed Timberwolf, (See EMacs Bottom Line, Goldman Accused of Misleading Congress, Clients.)

In that deal, Goldman had taken a short position on about 36% of the $1 billion in assets underlying its securities, and initially made $333 million in revenues and interest from that investment, but ultimately lost a net $455 million when it could not sell all of the Timberwolf securities, according to FOX Business Networks earlier report.

Last April, Sen. Levin questioned Daniel Sparks, the Goldman executive who ran Goldmans mortgage business at the time, on whether Goldman was misleading clients into buying investments its executives knew were steadily dropping into junk territory.

During the hearing, Sen. Levin pointed out to Sparks an e-mail exchange between him and former Goldman executive Thomas Montag (now at Bank of America) on the Timberwolf deal.

Boy that Timberwolf was one sh- deal, Montag wrote in his 2007 email to Sparks. How much of that sh- deal did you sell?

While Sparks was selling the deal as a positive investment to clients, according to emails the Senate received, Sparks was also emailing Goldman executives saying, Game over, bad news everywhere, and the business is totally dead.

The Senate subcommittee report had also accused Goldman of conflicts of interest in other asset-backed securities deals. Specifically, the report said Goldman allegedly withheld material information from clients, notably in a collateralized debt obligation deal dubbed Hudson Mezzanine-2006-1.

In the case of this CDO, Goldman Sachs told investors its interests were aligned with theirs even though the firm held 100 percent of the short side, says the Senate report.

The Senate report also says that Goldman executives self-selected the securities for the $2 billion deal, with no input from investors, which included Wall Street investment bank Morgan Stanley.

The Levin-Coburn report alleged that Goldman continued to not disclose that it would also be shorting this deal  betting on the default of the securities--even after a representative of one investor, the National Australia Bank, specifically asked questions about it.

The Senate report also said Goldman manipulated the deal to funnel off, or transfer the risks of $1.2 billion in shoddy mortgage loans to unwitting investors, away from the firm.

The report also said Goldman reaped net profits of $1.35 billion on just this deal alone.

The Securities and Exchange Commission has already won a record $550 million settlement against Goldman in a lawsuit in July 2010. The settlement came on the eve of Congressional passage of the Dodd-Frank financial reform bill.

 The SEC had sued Goldman for "making false and misleading statements to investors about a synthetic collateralized debt obligation that was designed to fail," the agency said in its suit. The fine is the largest penalty ever paid by a Wall Street firm, but it equates to just about 4% of Goldman's 2009 net profit.   

Elizabeth MacDonald joined FOX Business Network (FBN) as stocks editor in September 2007 and is the author of Skirting Heresy: The Life and Times of Margery Kempe (Franciscan Media, June 2014).
Follow Elizabeth MacDonald on Twitter @LizMacDonaldFOX.