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Consumer Fraud, Investor Fraud Investigated at Goldman Sachs

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Washington, DCA few weeks ago it was alleged that banking giant Goldman Sachs committed what amounted to consumer and financial fraud when it sold clients a complex investment linked to the value of homes. The investment was secretly designed to fail—which would have benefitted another firm that allegedly assisted the bank in the creation of the investment and planned to bet against it.

Goldman Sachs and Fabrice Tourre, an employee linked to the alleged wrongdoing, have denied all charges.

The Securities and Exchange Commission (SEC) filed a civil securities fraud case against Goldman Sachs two weeks ago, and the Washington Post reports today that a source conversant with the issue has said the SEC referred the investigation to the Justice Department for possible criminal prosecution.

The Washington Post points out that even the threat of criminal prosecution can doom an enterprise—as it did three decades ago after a criminal case was brought against Drexel Burnham Lambert. The firm settled the matter, but the Washington Post notes that the firm was "ruined" nonetheless.

Over and above the SEC charge, Goldman Sachs was the subject of what has been described as a "searing" Senate investigative report this past week, examining the firm's role in the recent financial crisis.

While Goldman Sachs took a hit in the midst of the deepest doldrums suffered by the financial markets in 2008, the firm quickly made it back to the black, with shares doubling in value since that time.

But since the SEC suit was filed on April 16, shares in Goldman Sachs have lost 20 percent in value. Investors in turn have lost $20.6 billion in market value just in the last two weeks.

And it gets worse: yesterday analysts at Standard & Poor's as well as Bank of America-Merrill Lynch downgraded Goldman's stock.

"Though traditionally difficult to prove, we think the risk of a formal securities fraud charge, on top of the SEC fraud charge and pending legislation to reshape the financial industry, further muddies Goldman's outlook," wrote Standard & Poor's analyst Matthew Albrecht on Friday.

It is also interesting to note, with reference to a potential conviction under consumer protection law, that a probe by the Manhattan US attorney's office was not based on an SEC referral. Law enforcement sources told the Washington Post that the probe was already in place and active before the SEC announced the civil case on April 16.

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