THE BLOG
06/01/2010 05:04 pm ET Updated May 25, 2011

New SEC Probe Eyes Trading in Goldman Shares

The battle between Goldman Sachs and the Securities & Exchange Commission has swung from a war of words to renewed warfare, with each side privately bad-mouthing the other.

I've learned authoritatively that the SEC -- aside from its April 16 law suit charging the investment banking biggie with fraud -- has recently kicked off a related investigation centering on the trading in Goldman shares that took place right around that April 16 disclosure that clobbered Goldman's stock.

Confirming this investigation, I recently obtained copies of a bunch of internal SEC documents from regulatory contacts that the commission sent to the brokerage community. They all relate to individual stock trading investigations which include a number of America's premier corporate names, one of which is Goldman.

The focus of this expanded SEC probe of Goldman -- which is also the subject of a federal investigation -- is the trading that took place in the firm's shares from April 14 through April 16 both here and abroad. The brokerage recipients of the SEC inquiries have been given 10 business days to provide the names of their clients who traded in Goldman's stock in that three-day period.

Why would the SEC commence such a probe? I got the usual reaction from the tight-lipped commission. "We do not comment on investigations," spokesman John Heine tells me.

Regulatory sources, however, speculate the agency is anxious to determine whether anyone may have illegally traded on inside information -- namely the announcement of the SEC action -- by selling or shorting Goldman's stock (a bet its price will fall) prior to the April 16 disclosure. This would logically include, I'm told, Goldman insiders and people close to the firm.

Accordingly, I asked a Goldman spokesman whether any of the firm's insiders (officers and directors) had indeed disposed of any of their Goldman shares prior to the announcement of the SEC law suit. That turned out to be a waste of time. The spokesman said he would check and get back to me, but he never did. Perhaps he had a memory lapse or maybe he was thinking about the long Memorial Day weekend.

An obvious question related to this issue is whether Goldman received a Wells notice prior to the SEC announcement. That's a notice the SEC usually sends to people and firms when it is planning to bring an enforcement action against them, and which, in turn, affords them the opportunity to make a case as to why such an action should not be brought.

Goldman, which has ridiculed the SEC charges and said it would fight them, declined to comment on whether it had received a Wells notice. One Goldman contact, though, tells me the firm did receive one last summer, but that it had no inkling of the timing of the SEC law suit filing shortly before it was announced. In fact, Goldman's co-general counsel has publicly stated the firm was surprised and disappointed at the SEC's action.

Anyone who might have engaged in any illegal trading in Goldman shares prior to the SEC announcement, presuming someone did, either avoided a stunning loss or made a bundle if they sold short. A day before that April 16 announcement Goldman shares closed at $184.27. On April 16, the stock, reacting to the news of the SEC charges, tumbled $23.57 or about 12.8% to $160.70.

A cursory examination of the trading in Goldman just before the SEC announcement found nothing glaring or highly unusual, but the volume on April 14 of 12,556,500 shares was somewhat higher than the roughly 9 million daily average volume of the month before.

How the SEC-Goldman battle plays out is anybody's guess, but it seems noteworthy that some agency staffers are telling former SEC attorneys that the commission has a strong case, contrary to claims by Goldman, its CEO Lloyd Blankfein, and Goldman investor Warren Buffett that the SEC case is weak.

"You just watch; we're going to make mince meat out of Goldman and Blankfein," one enforcement attorney told a former SEC staffer. One former SEC enforcement attorney, Tom Von Stein, previously told me Buffett may have to eat his words.

I bounced that mince meat comment off one Goldman contact, who responded: " You must have been told that by some goofball in the SEC's Disneyland office."

The crux of the SEC's case deals with Goldman's 2007 sale of subprime mortgages packaged in a collateralized debt obligation. The SEC suit alleges that Goldman permitted a hedge fund, Paulson & Co., to help choose the securities for the CDO and failed to tell investors who bought it that Paulson was actually shorting the CDO. The SEC also contends that Paulson paid Goldman about $15 million for structuring and marketing the deal.

Goldman's assertions notwithstanding that it did nothing wrong, Wall Street expectations are widespread that it's only a matter of time before the suit is settled with a hefty fine. Some put the settlement at about $700 million, but there has been media speculation that it could cost Goldman about $1 billion to get the SEC off its back. Meanwhile, inside Goldman, there is buzz the firm may be prepared to settle for a few hundred million. One Goldman analyst tells me the over-riding view within the firm is that a financial settlement is only a matter of time.

As for those other blue chip companies I mentioned earlier whose stock activity in specific time periods was under SEC investigation, they include Procter & Gamble, Phillip Morris, Walgreen and U.S. Steel.

Included in the latest round of stock trading investigations -- which it should be reiterated basically focus on the purchase and sale of securities -- are four leading technology companies: Hewlett Packard, National Semiconductor, Advanced Micro Devices and Micron Technology. Also toss in three major banks: Bank Of America, Citigroup and BB&T Corp.

Other companies whose trading is being scrutinized by the commission include Palm, which was recently acquired by Hewlett Packard for $1.2 billion, Moody's, Qualcomm, Capital One Financial, Ameriprise Financial, Dynergy, Morgan Stanley, Exelon Corp., Timken, Harman International, Janus Capital Group, Qwest Communications and Accenture, whose stock plunged from more than $40 a share to a penny earlier this month in one wild trading session in which the Dow plummeted almost 1,000 points.

What do you think? E-mail me at Dandordan@aol.com.