As my colleague Barbara Kiviat notes over at The Curious Capitalist blog, Goldman Sachs’ legal troubles are deepening. With the firm reportedly mulling settlements with both the SEC and a hedge fund that folded after an ill-fated CDO investment, the Wall Street Journal reported last night that the Justice Department has opened an investigation that could yield criminal charges against the Wall Street stalwart. Citing anonymous sources, the Journal story says the probe, which is being handled by the U.S. attorney’s office in Manhattan, is in its incipient stages and was initiated by an SEC referral. A Washington Post piece today has slightly different facts; it contends that the Justice Department was already investigating Goldman’s mortgage-trading operation for evidence of securities fraud before the SEC brought its suit April 16.
As the Journal makes clear, the ongoing investigation does not necessarily mean Goldman will face criminal charges:
Prosecutors haven’t determined whether they will bring charges in the case, say the people familiar with the matter. Many criminal investigations are launched that never result in any charges.
The criminal probe raises the stakes for Goldman, Wall Street’s most powerful firm. The investigation is centered on different evidence than the SEC’s civil case, the people say. It couldn’t be determined which Goldman deals are being scrutinized in the criminal investigation.
…
To bring any criminal charges in the Goldman matter, prosecutors would need to believe they had gathered evidence that showed that the firm or its employees knowingly committed fraud in their mortgage business. Proving such intent to break the law typically is the toughest hurdle for prosecutors to clear.
Another stumbling block: Such financial cases can be highly complex. Few outside of Wall Street understand arcane products such as collateralized debt obligations, the pools of mortgage-related holdings at the heart of the SEC civil case against Goldman.
But even there is a higher bar required for criminal securities-fraud cases, the mere specter of more charges adds another layer to the cloud of suspicion choking the company. Whether or not either of these allegations are ever prosecuted, they have severely tarnished the firm’s reputation. The news sent shares plummeting, and equity analysts downgraded Goldman’s stock.