Prosecutors in the U.S. Attorney’s Office for the Southern District of New York would have been remiss had they not opened a criminal investigation into possible secruties fraud in mortgage trading at Goldman Sachs, two of their former colleagues said today.
Word of the SDNY criminal probe leaked out on Thursday, nearly two weeks after the Securities and Exchange Commission filed a suit against the firm alleging the company defrauded customers who bought investments tied to risky mortgages.
The fact that criminal charges have not already been filed by SDNY’s Securities and Commodities Task Force is a clear sign that there was no smoking gun in the case, one former prosecutor said.
“If there was a real immediate threat, SDNY prosecutors would have issued a criminal charges the same day the SEC filed its civil securities fraud case against Goldman,” said a longtime former SDNY prosecutor. “My guess is there was tenion between the SEC and the DOJ and the SEC said, ‘F–k it, let’s go ahead.’”
The FBI opened its own probe of the Goldman transactions weeks ago, according to law enforcement sources cited in a Washington Post story today. A separate investigation is being conducted by SDNY’s 20-lawyer securities task force headed by Assistant U.S. Attorney Christopher Garcia and his deputy, Marc Berger. Janice Oh, deputy public information officer for the SDNY, declined to comment on which line attorneys had been assigned to the probe.
The SDNY’s Goldman probe is playing out no differently than any other similar securities case, two former prosecutors said. Criminal Division Chief Richard Zabel or task force chief Garcia assigned the probe to a relatively unburdened line lawyer who in turn issued one or more subpoenas.
“They would be remiss not to cut a subpoena,” the former prosecutor said. “The press is overreacting to all this. Everyone needs to take a step back.”
Another former SDNY prosecutor, who headed a task force in the office, agreed.
“You can’t read much into anything so far,” said the former task force chief who spoke on condition of anonymity. “In a case with this kind of profile, there’s likely to be an inquiry of a criminal nature. A responsible prosecutor is going to kick the tires. We have yet to see if there will be any significance attached to it.”
Among the SDNY prosecutors best-suited to handle the Goldman probe, one former prosecutor said, are Assistant U.S. Attorneys Maria Douvas and Nick Goldin. Other candidates include special counsel Bonnie Jonas or Assistant U.S. Attorneys Julian Moore and William Stellmach. Other task force prosecutors including Jonathan Streeter, Marc Litt and Lisa Baroni are busy working on the Galleon and Madoff cases.
SEC Enforcement Chief Robert Khuzami, himself a former SDNY prosecutor, most likely referred the SEC suit to Garcia before filing it on April 16, according to former SDNY prosecutor Douglas Jensen of Park & Jensen LLP in New York.
“The way it usually works is the SEC makes a phone call to the task force chief — in this case Chris Garcia — and says, ‘We’ve got a probe on x, are you interested?”’ said Jensen, whose tenure as a SDNY prosecutor overlapped Khuzami’s. “It’s not a formal process where members of the task force meet with higher-ups.”
Goldman spokesman Lucas Van Praag told Bloomberg Friday that the firm was “not surprised by the report of an inquiry,” and plans to “cooperate fully with any request for information.”
Pamela Chepiga (Allen & Overy)
Players on all sides of the Securities and Exchange Commission’s civil fraud case against Goldman Sachs & Co. and one of its employees are alumni of the U.S. Attorney’s office for the Southern District of New York.
The lawyer for Fabrice Tourre, the 31-year-old Goldman banker at the center of the charges involving a derivatives deal, is Pamela Chepiga, a partner at Allen & Overy LLP in New York. Chepiga headed the SDNY’s Securities and Commodities Task Force from 1982 until 1984.
At that time Barbara S. Jones – who is now the federal judge assigned to the Goldman case — was prosecuting the SDNY’s RICO case against four members of La Cosa Nostra’s Bonnano family. Also in the 1980s, the man who would later become Goldman’s global compliance chief, Alan Cohen, had just joined the SDNY office as a budding prosecutor. Cohen would eventually succeed Chepiga in 1987 as securities and commodities task force chief.
Alan Cohen (Goldman Sachs)
By the time now-SEC Enforcement chief Robert Khuzami came on the SDNY scene as a prosecutor in 1992, Cohen had defected to O’Melveny & Myers, Jones was a judge and Chepiga was a securities lawyer in private practice.
Khuzami, 53, who made a name for himself prosecuting the 1993 World Trade Center bombing, brought a new, aggressive, prosecutorial approach to civil enforcement at the SEC that is best epitomized by the Goldman suit. He installed another SDNY veteran, George Canellos, at the helm of the SEC’s regional office in New York to help turn the agency around.
Not since former SDNY Chief Judge Michael B. Mukasey was nominated in 2007 to serve as U.S. Attorney General has there been as much buzz about SDNY alumni, former prosecutors say. But given SEC Chairman Mary Shapiro’s decision to infuse the agency with SDNY alumni, it’s not surprising to find so many of them on all sides of a case like SEC-Goldman.
“What you have are highly motivated, very accomplished people who start out as prosecutors for the Southern District of New York and go on to take prominent roles in government, at companies and in private practice,” said former prosecutor Marcus Asner, a partner in Arnold & Porter’s New York office, who left the SDNY office in 2008.
Robert Khuzami (org)
Before joining the SEC, Khuzami was general counsel at Deutsche Bank Americas, where he advised bankers structuring the same kind of synthetic collateral debt obligations tied to subprime mortgages that are at issue in the SEC suit. He has recused himself from all the agency’s dealings with Deutsche Bank.
In case against Goldman, the agency has accused Tourre of creating and selling the synthetic CDOs without disclosing that hedge fund Paulson & Co. helped pick them and was betting against them.
George Canellos (Milbank)
Khuzami, a registered Republican who in the past has said he twice voted for President George W. Bush, has also adopted a tool he used as a SDNY prosecutor: He did not alert Goldman before filing suit April 16. The agency had warned Goldman in the form of a Wells notice last year that it was probing the CDOs and might eventually file suit. At a hearing in May before the Senate Banking Committee, Khuzami said, “We must convey to all defendants in SEC actions that not only do we assemble winning cases against them, but also we are prepared to go to trial and we will win.”
A former SDNY prosecutor in private practice said the SEC chose not to warn Goldman because the agency is now “using tougher prosecutorial tactics and it must really have some good stuff.”
Khuzami’s SEC tenure ultimately may be judged on whether the agency wins the Goldman case. The firm denies the charges. The day he announced the case, Khuzami said: “The product was new and complex but the deception and conflicts are old and simple.”
Goldman’s lead lawyer Richard Klapper of Sullivan & Cromwell in New York, will be defending the firm with the assistance of former White House Counsel Greg Craig of Skadden Arps Slate Meager & Flom in Washington.
Samuel W. Seymour (Sullivan & Cromwell)
Although neither Klapper nor Craig were SDNY prosecutors, SullCrom partners Sam Seymour, an appeals maven, and Steven Peikin, a white collar criminal defense star are SDNY alumni waiting in the wings for the case to play out, two former colleagues said.
“It should be fascinating,” said Alan Kaufman of Kelly Drye & Warren in New York, who previously served as chief of the Criminal Division in the U.S. Attorney’s Office for the Southern District of New York from 1999 to 2002. He was also a SDNY AUSA from 1973 to 1980, including stints at the helm of the Official Corruption, Special Prosecutions Unit and the Organized Crime Strike Force.
Steven Peikin (Sullivan & Cromwell)
Last week, Goldman told reporters that the SEC’s case hinges on the actions of Tourre, who was charged with misleading investors about a mortgage-linked investment in 2007. Goldman placed London-based Tourre on paid leave, as he was also meant to be de-registered from the Financial Services Authority.
Goldman General Counsel Greg Palm told Bloomberg: “If we had evidence that someone here was trying to mislead someone, that’s not something we’d condone at all and we’d be the first one to take action.”
The Goldman Sachs case has been assigned to a federal judge who made her mark trying mafia cases as an assistant U.S. attorney in the Southern District of New York, according to a Wall Street Journal article published Sunday (subscription required).
U.S. District Judge Barbara S. Jones has been assigned to handle the Securities and Exchange Commission’s civil case against Goldman, which was announced last week. The SEC alleged that the investment firm defrauded customers who bought investments tied to risky mortgages.
Jones handled a number of mob cases as a New York prosecutor in the 1970s and 1980s, the Journal said. She also was involved in the first RICO cases against the Mafia, according to a 2005 New York Times article.
Jones presided over the eight-week trial of WorldCom’s former chief executive Bernard Ebbers in 2005. Ebbers was ultimately convicted of securities fraud and other charges for his role in the $11 billion accounting fraud scheme that damaged the entire telecommunications industry.
Estee Lauder general counsel Sara Moss, a friend and former colleague of Jones’ in the Southern District U.S. Attorney office, told the Journal that Jones does not allow her emotions to become involved in her cases.
“Temperamentally she’s well suited to this,” Moss said. “In this case in terms of her background she doesn’t bring any bias to the case. She’s smart and even tempered.”
