The chairman of the U.S. Senate's investigative subcommittee said he believes Goldman Sachs officials made misleading statements about their trading during the financial crisis and should be investigated criminally.
Sen. Carl Levin (D-Mich.) said on Wednesday that he plans to refer Goldman officials, and potentially officials from other organizations, to the Justice Department for possible prosecution and to the Securities and Exchange Commission for possible civil proceedings.
“In my judgment, Goldman clearly misled their clients and they misled the Congress,” said Levin, the chairman of the Senate Permanent Subcommittee on Investigations.
Levin’s statement came after a two-year, bipartisan investigation by his subcommittee. In one widely covered hearing in April 2010, as part of the investigation, senators sparred with Goldman officials over a mortgage-related product that a Goldman executive had referred to in an e-mail as a “shitty deal.”
Levin and Sen. Tom Coburn (R-Okla.), the subcommittee’s ranking Republican, are releasing a 639-page report (PDF) on the financial crisis, along with 5,800 supporting documents. The report focuses on the actions of Goldman, Washington Mutual Inc., the U.S. Office of Thrift Supervision, credit ratings agencies and Deutsche Bank. The two senators spoke about the report at a news conference on Wednesday.
Levin must still go through a process to finalize any referrals, but he made his position clear. “We will be referring this matter to the Justice Department and the SEC,” Levin said.
Asked about Levin’s plans, a Goldman spokesman released a statement on Wednesday defending the testimony of company officials. “The testimony we gave was truthful and accurate and this is confirmed by the Subcommittee's own report,” the statement says in part.
The spokesman, Michael DuVally, declined to comment on whether the company or its executives have hired counsel in response to the report. Last year, in negotiating the settlement of an SEC complaint, Goldman assembled a legal team led by Sullivan & Cromwell’s Richard Klapper and Skadden, Arps, Slate, Meagher & Flom’s Gregory Craig.
The Justice Department has been the target of criticism from lawmakers, consumer advocates and others for bringing few criminal cases related to companies at the center of the financial crisis, such as Washington Mutual. Without going into the details of cases, DOJ officials have defended their performance by saying they bring only cases they can prove.
Levin said prosecutors should look at not only Goldman’s statements to the public about its investment products, but also the statements officials made to Congress. Goldman officials, including chief executive Lloyd Blankfein, gave testimony that was “inaccurate,” Levin said. It is a crime under federal law to make a false statement to Congress or to obstruct congressional proceedings.
At issue are the investments Goldman made regarding mortgage-backed securities. Citing e-mails and other internal company documents, the Levin-Coburn report alleges that Goldman placed major bets against those types of securities even as it continued to sell them to clients. Blankfein testified a year ago that Goldman was “not consistently or significantly net short the market in residential mortgage-related products in 2007 and 2008.”
The Levin-Coburn report says Goldman’s denials “are directly contradicted by its own financial records and internal communications, as well as its own public statements in 2007, and are not credible.”
In its statement on Wednesday, the company cast doubts that the report’s evidence was so conclusive. “The report references testimony from Goldman Sachs witnesses who repeatedly and consistently acknowledged that we were intermittently net short during 2007. We did not have a massive net short position because our short positions were largely offset by our long positions, and our financial results clearly demonstrate this point,” the statement says.
The Senate’s Permanent Subcommittee on Investigations is known for conducting lengthy, resource-intensive inquiries, but this one was massive even by that standard, Levin said. Staff lawyers and investigators reviewed millions of pages of documents, according to the report.
“It’s the longest report that our subcommittee has ever released. It comes as a result of the longest investigation that our committee has ever done,” Levin said.
Coburn added, “It shows without a doubt the lack of ethics in some of our financial institutions, who embrace known conflicts of interest to accumulate wealth for themselves.”