Goldman Sachs Fraud Probe Could Bring Criminal Charges

The Justice Department has started a preliminary investigation of claims that the investment bank Goldman Sachs misled clients by selling them pieces of a complex mortgage deal that the bank expected would fail, the New York Times reported Friday.

The investigation could lead to criminal charges on the heels of a civil lawsuit filed against the firm by the Securities and Exchange Commission, which accused Goldman Sachs of, in effect, betting against its own investment. At a subcommittee hearing this week on Capitol Hill, angry senators repeatedly asked Goldman executives, including CEO Lloyd Blankfein, to defend a 2007 deal in which the bank and a partnering hedge fund made money by betting that the housing market would fail. At the same time, unwitting investors were buying Goldman paper linked to the value of home mortgages, the SEC says.

Making a criminal case, however, requires a much higher burden of proof that a civil lawsuit. The matter is in the hands of federal prosecutors for the Southern District of New York, who must decide whether to move forward with the case. Earlier this week, 62 U.S. House members asked the Justice Department to open an investigation of the Goldman deal, called Abacus 2007-AC1.