New low for Goldman Sachs stock as legal problems mount

By David Ellis, staff writer


NEW YORK (CNNMoney.com) -- Goldman Sachs' legal troubles just keep piling up -- and it's becoming a bigger headache for the investment bank and its shareholders.

Shares of Goldman Sachs sat out Thursday's market rally. The stock tumbled nearly 3% in mid-afternoon trading and hit a new 52-week low after reports surfaced late Wednesday that the Securities and Exchange Commission is investigating a mortgage investment Goldman bundled and sold in 2006 called Hudson Mezzanine.

blankfein_090211.03.jpg
Goldman Sachs CEO Lloyd Blankfein
gs.png
Goldman shares have continued to fall since the SEC charged the company with fraud in April.

The SEC is already investigating possible fraud involved with an investment Goldman created called Abacus. A spokesman for the SEC declined to comment on whether the agency was indeed conducting an investigation into Hudson Mezzanine.

The reports follow news that Wall Street's top firm was hit with a lawsuit from Basis Capital, an Australian hedge fund that invested in Timberwolf, another mortgage-backed security that Goldman sold in 2007. Basis is seeking more than $1 billion in damages in its civil suit.

A representative from Goldman Sachs (GS, Fortune 500) declined comment on the reported government investigation, but issued a sharp rebuke to the Timberwolf suit, calling it "a misguided attempt by Basis...to shift its investment losses to Goldman Sachs."

The latest developments are another setback for the once-impervious investment bank. A number of shareholder suits have been filed against Goldman in recent months. There have also been reports it is facing a criminal investigation by federal prosecutors.

At the center of it all however, is the SEC's civil suit against Goldman, in which it charged the firm with defrauding clients on the sale of Abacus, a collateralized debt obligation, or CDO.

So far, there have been few signs of progress on the case. But that may soon be changing.

According to documents filed with the U.S. District Court for the Southern District of New York, Goldman currently has until June 22 to file a formal response to the SEC's suit.

Experts suggest that Goldman will most likely call the government's bluff and demand it drop the case as opposed to reaching a settlement by the deadline.

Such a move could help Goldman save face after it has repeatedly denied any wrongdoing. It would also potentially give the firm more insight into the SEC's case as well as additional time to negotiate a possible settlement.

The spokesmen for the SEC and Goldman Sachs declined to comment on the status of the Abacus case.

But legal observers are confident that neither party has the stomach for an ugly courtroom battle. Some have suggested the SEC does not want to risk an embarrassing courtroom loss given how anxious it has been to shore up its reputation in the wake of the Bernard Madoff Ponzi scheme.

Goldman, on the other hand, doesn't want to tangle with one of its biggest regulators and bringing any more negative attention to the company.

"Both parties are in very deep water," said Thomas Gorman, a former attorney in the SEC's division of enforcement who now works in private practice at the law firm Porter Wright.

What seems certain is that the two sides will eventually reach a settlement. How quickly that happens remains anyone's guess. According to several recent reports, Goldman attorneys have met with SEC officials. But the two parties are apparently no closer to an agreement.

Jay Brown, a professor at the University of Denver Sturm College of Law, who focuses on corporate and securities law, said the possibility of a settlement by June 22 was "a very unlikely prospect."

Brown added that even if they were getting nearer to a deal, the parties would probably need more time just to hammer out the details.

Experts have said that one of biggest potential stumbling blocks in any negotiation is the terms of the settlement, versus any fine Goldman might be assessed.

Many believe that Goldman will attempt to seek a deal in which it agrees to lesser charges to avoid any impact on its client base and limit its exposure to the various shareholder suits the company faces. That may be a tough compromise however for the SEC, which is betting its reputation on this case.

"Goldman will want to get rid of that fraud charge and there is no reason for the SEC to drop it now," said Gorman.

One former high-ranking official in the SEC's enforcement division said dragging out the settlement talks, however, won't help either party. While the SEC has plenty of other cases to prosecute, Goldman is just as anxious to get out of the spotlight and get back to the business of making money.

"It doesn't help Goldman or the SEC to have it go on for a long period of time," said the attorney, who requested anonymity out of fear of the impact it could have on business at his current law firm. "If you are going to settle, do it sooner and get it over with." To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Index Last Change % Change
Dow 17,279.74 13.75 0.08%
Nasdaq 4,579.79 -13.64 -0.30%
S&P 500 2,010.40 -0.96 -0.05%
Treasuries 2.59 -0.04 -1.60%
Data as of 8:31am ET
Company Price Change % Change
Yahoo! Inc 40.93 -1.16 -2.74%
Microsoft Corp 47.52 0.84 1.80%
Bank of America Corp... 16.95 -0.09 -0.53%
Oracle Corp 39.80 -1.75 -4.21%
Facebook Inc 77.91 0.91 1.18%
Data as of Sep 19

Sections

The automaker is recalling Cadillac XTS and Chevrolet Impalas because of a problem with the electronic parking brake arm. More

The Bill and Melinda Gates Foundation has given more money than many western nations. More

It's really good to be Larry Ellison. The Oracle founder is stepping down as CEO, so maybe he'll have more time to enjoy his glamorous life. More

As Occupy Wall Street goes on its debt-abolishing tear, thousands of people across the country are begging them to forgive their loans. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.