US to probe whether Goldman misled clients

US senators formally referred to the Justice Department and the Securities and Exchange Commission (SEC) an investigative report that found Goldman Sachs Group misled clients about mortgage-linked securities.

Senators Carl Levin of Michigan, the Democratic chairman of the Permanent Subcommittee on Investigations, Tom Coburn of Oklahoma, the senior Republican, signed a letter asking the agencies to examine the panel’s report, Levin said in an interview yesterday. The results of the investigation, made public by the committee April 13, lay much of the blame for the credit crisis on Wall Street banks that earned billions by enticing clients to buy the risky bond deals.

“If something comes up that needs to be reviewed by some agency, it gets referred,” said Levin. “That’s the way we do it.”

The scrutiny is a setback for Goldman Sachs, which hired lawyers, lobbyists and public relations specialists to monitor the two-year Senate probe and tamp down any controversy that arose from the subcommittee’s conclusions.

John Hart, Coburn’s spokesman, did not respond to a request for comment. SEC spokesman John Nester declined to comment.

Levin said in the interview that the referral sends the entire report, rather than specific facts, to the agencies. The Senate inquiry also examined the role of credit-rating firms in the meltdown, lax oversight by regulators and the decline in lending standards at banks including Washington Mutual that fuelled the mortgage bubble.

Top of list
A formal referral from the Senate is “much more than a symbolic gesture” because it would prompt an agency to put the matter “at the top of its list,” said Robert Hillman, a professor at the University of California, Davis, School of Law.

For Goldman Sachs, “the question is how much pain they’re going to have to endure with the public spotlight for these revelations, and that depends in part how long the government’s willing to drag this out,” said James Cox, a securities law professor at Duke University School of Law.

Still, Cox said he is “very sceptical” that the examinations by the agencies will ultimately lead to new claims against Goldman Sachs, which last year paid $550 million to settle SEC claims related to its marketing of the complex securities known as collateralised debt obligations (CDOs).

Attorney General Eric Holder, testifying before the House Judiciary Committee yesterday, confirmed that his department is scrutinising the report. Two people briefed on the matter confirmed that the SEC enforcement division is also studying it.