Galvin Conducts Investigation of Goldman Sachs

April 21, 2010 – The Boston Globe – Galvin also scrutinizing Goldman

Massachusetts Secretary of State William F. Galvin is conducting a separate investigation of Securities Fraud Lawyers – Securities Fraud Attorneys – Stock Broker Fraud Lawyers – Securities Arbitration AttorneysGoldman Sachs & Co. that he said has similarities to the federal government’s case against the Wall Street titan: potential conflicts of interest and a corporate culture of favoring certain clients.

His office has been investigating the practice at Goldman of “huddles,’’ or meetings in which the company’s traders and securities analysts discuss investments and market trends, and then, allegedly, share insights from these meetings with hedge funds and other large clients. Galvin said the practice gives certain clients valuable information ahead of others.

“It’s a recurring theme. It’s conflicts of interest,’’ Galvin said in an interview yesterday. “It is illustrative of the culture. Even if you take the official explanation being offered by Goldman, there’s a culture that preferred customers get special treatment.’’

On Friday, the US Securities and Exchange Commission charged Goldman with civil fraud, alleging that it failed to tell two large investors in a fund of risky mortgage-related securities that another client, a hedge fund, had helped select the securities and that they were doomed to fail. Regulators alleged that Goldman and one of its London bankers, Fabrice Tourre, didn’t tell investors the hedge fund’s role in picking and betting against the securities.

The investors lost about $1 billion on the deal, while the hedge fund reaped $1 billion.

In both cases regulators are investigating whether Goldman provided information to some clients but not to others — and did so for profit.

Goldman declined to comment on Galvin’s investigation. But the firm yesterday continued to fight back against the SEC charges. During a teleconference with stock analysts, Goldman executives insisted they would “never intentionally mislead anyone’’ about an investment and that Goldman had lost about $100 million on the deal.

“We have never condoned, and would never condone, inappropriate behavior by any of our people,’’ Goldman’s cogeneral counsel, Greg Palm, said on the analyst call. He further said, “We certainly had no incentive to structure a transaction that was designed to lose money.’’

Goldman has long been the most revered firm on Wall Street. And until now, it had emerged relatively unscathed from the global credit crisis and mortgage market collapse that destroyed some competitors.

Even amid the chaos of late 2008, Goldman managed to turn a $2.3 billion profit. Yesterday, for the first quarter of 2010, the firm reported $3.3 billion in earnings on $12.8 billion in revenue — evidence, Goldman’s chief financial officer said, that its customers are happy.

But regulators and securities lawyers believe the SEC’s charges — coming two years after the market’s crash — are just the tip of the iceberg, both for Goldman and other major players in the brokerage business.

“I definitely think this is just the first step,’’ said Stuart Meissner, a New York securities lawyer and former regulator. He said SEC investigators are likely to pore over other investment firms’ deals involving collateralized debt obligations, the pools of mortgage-related bets at issue in the Goldman case.

Other big packagers of mortgage-related securities included Merrill Lynch & Co., now part of Bank of America Corp. Merrill Lynch declined to comment.

During yesterday’s conference call, several analysts pressed Goldman executives, unsuccessfully, about the SEC case, and whether Goldman might face additional charges.

“Our policy has been we always disclose to our investors anything we consider material,’’ said Palm. But when one analyst, Glenn Schorr of UBS Securities, pointed out that Goldman had not previously disclosed the SEC investigation, Palm was silent.

Agitated by the time another analyst raised the issue, Palm said, “Look, it’s this one case that’s been brought. That’s what I can say.’’

The Goldman case comes as Congress is hashing out legislation to impose new regulations on the financial industry that are intended to prevent credit crises and additional taxpayer bailouts of troubled institutions. Galvin, the Massachusetts regulator, said the Goldman case gives federal lawmakers a narrow window during which they should pass new rules requiring greater oversight and disclosure.

Republicans in Congress, meanwhile, sent a letter to the SEC yesterday, raising questions about the timing of the lawsuit against Goldman, and suggesting that it was meant to put pressure on lawmakers to pass a financial reform measure. The SEC denied its Goldman action was politically motivated.

Call the Meissner firm at 212-764-3100 if you or you firm may have been impacted by this matter.