In a Scathing Report, Senator Says Goldman Misled Investors

(April 14, 2011) — A report by a United States Senate subcommittee has found that Goldman Sachs misled clients and Congress about the banking giant’s investments in securities tied to toxic mortgages.

The scathing report comes amid rising sentiment in Washington that Wall Street is being overly regulated by the new Dodd-Frank financial regulation bill, which President Obama signed last July.

Senator Carl Levin (D-Michigan) has asserted that he wants the Justice Department and the Securities and Exchange Commission (SEC) to investigate whether Goldman Sachs violated the law by misleading clients who bought collateralized debt obligations (CDOs) without knowledge that the firm was betting against that they would decline in value. In response to the 635-page report by the Senate Permanent Subcommittee on Investigations stemming from a two-year bipartisan analysis on the drivers of the crisis, Goldman issued a statement saying:

“While we disagree with much of the report, we take seriously the issues explored by the Subcommittee. We recently issued the results of a comprehensive examination of our business standards and practices and committed to making significant changes that will strengthen relationships with clients, improve transparency and disclosure and enhance standards for the review, approval and suitability of complex instruments.” 

“In my judgment, Goldman clearly misled their clients and they misled the Congress,” Levin said at a press briefing, Bloomberg reported. Additionally, Levin advised that federal prosecutors should review whether to bring perjury charges against Goldman Sachs Chief Executive Officer Lloyd Blankfein and other current and former employees who testified in Congress last year.

A release issued by Levin’s office yesterday, describing the conclusion of the investigation, stated:

“Using emails, memos and other internal documents, this report tells the inside story of an economic assault that cost millions of Americans their jobs and homes, while wiping out investors, good businesses, and markets…High risk lending, regulatory failures, inflated credit ratings, and Wall Street firms engaging in massive conflicts of interest, contaminated the US financial system with toxic mortgages and undermined public trust in US markets. Using their own words in documents subpoenaed by the Subcommittee, the report discloses how financial firms deliberately took advantage of their clients and investors, how credit rating agencies assigned AAA ratings to high risk securities, and how regulators sat on their hands instead of reining in the unsafe and unsound practices all around them. Rampant conflicts of interest are the threads that run through every chapter of this sordid story.” 

Pension funds were often the purchasers of faulty CDOs, resulting in a trend of pensions suing financial institutions since the economic crisis. In early January 2010, for example, a Virgin Islands pension fund sued Morgan Stanley over CDO sales, claiming the Wall Street bank marketed $1.2 billion of risky mortgage-related notes that it believed would fail.

Other instances of institutional investors suing banking giants as a result of alleged deception are numerous. In 2009, a group of pension funds sued JP Morgan, the nation’s second-largest bank by assets, for allegedly breaching its fiduciary duty, profiting from a troubled investment vehicle while clients lost millions of dollars. According to the documents, the bank allegedly chose to ignore evidence that its clients were losing money in a downtrodden investment vehicle. Despite overwhelming concerns about the structured investment vehicle (SIV) called Signa, the bank allegedly still kept client money in the SIV while it collapsed and acted in its own financial interests, the suit noted.

In March, US District Judge Paul Crotty named the Arkansas Teachers Retirement System, the West Virginia Investment Management Board, and the Plumbers and Pipefitters National Pension Group as co-lead plaintiffs in an investor lawsuit against Goldman Sachs Group. The pension schemes filed the suit in an effort to recover losses from the banking giant’s alleged misleading statements about Abacus, a credit derivative product based on mortgage-backed securities. Represented by the law firms Robbins Geller Rudman & Dowd LLP and Labaton Sucharow LLP, the funds reportedly suffered the most severe losses connected with the case of any of the proposed plaintiffs.