NEW YORK — Goldman Sachs stepped up its defense against civil fraud charges Monday, telling clients it did not withhold information in a complex transaction involving risky mortgage securities. But a big question was: Will other big investment banks face similar charges?
In a letter to clients, Goldman Sachs Group vowed to fight the government's charges that the bank and one of its vice presidents misled investors by selling complex financial products tied to mortgages that were expected to fail. Both Goldman Sachs and the vice president, Fabrice Tourre, were named in the Securities and Exchange Commission lawsuit on Friday.
The SEC charged that Goldman Sachs did not tell two clients that the investments they bought were crafted by billionaire hedge fund manager John Paulson, who was betting on them to fail.
"Goldman Sachs would never condone one of its employees misleading anyone, certainly not investors, counterparties or clients," the bank said in the letter to clients. A copy of the note was obtained by the Associated Press.
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The bank fought back against the government's charges, saying, "The SEC does not contend that the two professional institutional investors involved did not know what they were buying, or that the securities included in this privately placed transaction were in anyway improper."
The two investors, the German bank IKB Deutsche Industriebank AG and the financial consulting firm ACA Management LLC, "were provided extensive information about those securities and knew the associated risks," Goldman Sachs said.
The bank also said it lost $90 million on the deal, but it did not explain how it incurred the loss.
Meanwhile, many observers, believing that other banks were involved in similar deals, wondered whether more companies would be charged.
An SEC spokesman declined to say Monday whether firms other than Goldman Sachs are under investigation. But financial experts say it's likely that other big names could find themselves being questioned.
"Wall Street is full of copycats," said John Coffee, a securities law professor at Columbia Law School. "Once you know which deals you're talking about, it's not hard to see who else was doing it."
At the height of the housing boom, several big banks were busy packaging and selling investments tied to mortgage securities to meet investor demand. Such securities, called synthetic collateralized debt obligations, or CDOs, reaped huge fees for banks but later were blamed for creating the credit crisis and worsening the recession.
Among the biggest sellers of CDOs were Merrill Lynch & Co., now part of Bank of America Corp.; Citigroup; Swiss banking giant UBS; and German bank Deutsche Bank, according to a banking industry official with knowledge of the transactions. He spoke on condition of anonymity because he wasn't authorized to publicly discuss the banks' dealings.
Citigroup denied any involvement in the transaction Goldman Sachs is charged in connection with. But Citigroup said it has talked with the SEC during the agency's industrywide probe of the role of derivatives in the financial crisis.
"We are fully cooperating with these investigations and it would not be appropriate for us to comment further," John Gerspach, Citigroup's chief financial officer, said during a conference call with reporters after announcing the bank's first-quarter earnings.
A Citigroup spokesman declined to comment on whether the SEC has indicated it's pursuing civil charges against the bank. That information would be part of what's known as a Wells notice, a letter describing probable charges against a company and requesting a response.
According to media reports, Goldman Sachs received such a notice in June 2009. The bank did not disclose the notice to investors. Such a move is required only if the bank believes the notice would have a material impact on its business or shareholders.
Bank of America has not received a Wells notice regarding Merrill Lynch, a person with knowledge of the matter said on condition of anonymity because he wasn't authorized to discuss the regulatory issues.
UBS and Deutsche Bank declined to comment.