The federal prosecutors investigating Goldman Sachs are focusing on Timberwolf, the infamous "shitty deal" repeatedly cited in a tense Senate hearing last month, according to people who have been contacted by the Manhattan U.S. Attorney's office.
The probe raises the possibility of criminal charges against the storied Wall Street firm, which was charged in April by the U.S. Securities and Exchange Commission with civil fraud for allegedly misleading investors about another subprime mortgage-related security called Abacus.
Investigators from the U.S. Attorney's office have reached out to individuals involved in the deal, including David Mapley, the former independent director of an Australian hedge fund who claims that the firm collapsed shortly after Goldman sold it $100 million of securities in Timberwolf, a $1 billion collateralized debt obligation.
In an interview with the Huffington Post from his office in Geneva, Mapley said that he has been contacted by the U.S. Attorney's office and that he expects to be interviewed by them soon. Mapley brought his complaints about Goldman's role in the deal to the SEC in December 2007, met with SEC lawyers several times in 2008 and he says that he continues to talk to them.
"Overall, the whole thing was a fraudulent concoction," says Mapley, who says that it was one of the most egregious cases he had seen in his decades working in finance. "We examined the whole trade, what led up to the trade, the way it was marketed and everything about it was inaccurate. You think you're buying one thing and what you see is totally different."
Among the most serious allegations, Mapley claims that Goldman sold Timberwolf securities to the fund at marked-up prices -- while Goldman's trading desk was busy shorting such CDOs tied to toxic subprime mortgage securities.
Mapley says that the hedge fund, Basis Yield Alpha Fund, where he was an outside director, ultimately went into liquidation "with Timberwolf tipping the balance."
Asked if it was indeed a "shitty deal" -- as it was dubbed by Sen. Carl Levin, chairman of the Senate Permanent Subcommittee on Investigations at last month's hearing -- Mapley had a one-word answer: "Absolutely."
The fund, which claims that its managers were deceived by Goldman when it bought two $50 million tranches of Timberwolf, is negotiating with the firm over a possible settlement, reported Reuters reporter Matthew Goldstein last week.
Michael DuVally, a spokesman for Goldman, declined to comment on whether the firm has been contacted by the U.S. Attorney's office.
As for Mapley's claims, DuVally noted that Goldman lost several hundred million dollars on Timberwolf, adding:
"Basis advertised itself as a highly experienced professional CDO manager and investor and I would also say that Basis had the same information regarding the underlying portfolio as Goldman Sachs had."
The law firm did not return calls for comment. Several other parties involved in the deal, as well as partners in the Australian hedge fund, declined comment.
The SEC focus on Abacus surprised Mapley, since the Timberwolf deal seemed to him to be a stronger case as it involves allegations that Goldman bet against a deal it marketed to clients. In comparison, the Abacus case involves claims that Goldman failed to disclose that a short seller -- Paulson & Co. hedge fund -- helped select the assets in a CDO tied to subprime mortgages.
Of the two deals, the Timberwolf case seems better suited to the Justice Department, says Columbia University professor John Coffee, who recently testified in Congress about whether Wall Street fraud necessitates tougher civil and criminal laws and jail time for bad bankers.
But Coffee cautions that the Justice Department will proceed very carefully, considering that it lost one of the few criminal cases brought in the wake of the financial crisis -- two Bear Stearns traders were found not guilty last November of subprime fraud in a case that touched on the Timberwolf deal.
"Usually, these cases end up in a deferred prosecution agreement," says Coffee, referring to a common option in white-collar cases where a defendant agrees to pay fines, implement reforms and cooperate with an investigation. He explains that such agreements, as well as settlements, are preferred under the assumption that firms could not survive a federal indictment.
A spokesperson for the U.S. Attorney's office declined comment, as is their standard practice.