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April 30, 2010 10:52 AM

Two New Headaches for Goldman

Posted by Zach Lowe

This is a surely a week Goldman Sachs Group Inc. would like to forget, and not just because several of its top executives were forced to spend hours enduring blistering questions from a U.S. senate committee and listening as profane internal company e-mails were read back in front of a national TV audience.

Goldman bankers awoke Friday to confront two new headaches. The first was the news--which actually broke late Thursday in various publications, including The New York Times and The Wall Street Journal  --that federal prosecutors in Manhattan have opened a criminal investigation into Goldman's trading.

It is unclear exactly which trades federal prosecutors are scrutinizing, the WSJ says, though the consensus seems to be that the probe will focus on Goldman's role in creating and marketing collateralized debt obligations linked to mortgage-backed securities.

As you surely know by now, the SEC has sued Goldman and one individual Goldman banker for alleged fraud in the marketing of one such CDO. Sullivan & Cromwell is representing Goldman in that matter. Richard Klapper, the lead S&C lawyer representing the bank in the SEC case, has not responded to our requests for comment. That case focuses on whether Goldman was required to disclose that hedge fund manager John Paulson played a role in selecting the contents of the CDO while simultaneously betting against the investment vehicle. 

The other fresh setback for Goldman, according to Reuters, is the decision by a federal judge in New York not to dismiss a suit filed against it and several other banks by 15 California cities and counties. The plaintiffs claim the banks helped rig the market for municipal bonds and derivatives, Reuters reports. Specifically, the suit accuses the bank defendants--which deny the allegations--of "rigging the process by which the U.S. public and nonprofit entities acquire municipal derivatives, sharing their illegal gains through kickbacks to one another, and making other secret, undisclosed arrangements," Reuters reports.

So, yeah. Not a good week for Goldman Sachs.

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