Government Probe into Wall St. Sales Widening

Wednesday, May 12, 2010

Government Probe into Wall Street Sales Widening

By Charlie Gasparino

FOXBusiness

The government has ramped up its investigation of Wall Street’s sale of toxic securities during the financial crisis to include firms other than Goldman Sachs (GS: 147.41, 5.37, 3.78%) and Morgan Stanley (MS: 27.79, -0.6, -2.11%).

Sources tell FOX Business

that the Securities and Exchange Commission's most active investigations so far also include Deutsche Bank (DB: 65.04, 0.76, 1.18%) and Citigroup (C: 4.18, 0.01, 0.24%), two of the biggest packagers of the toxic debt, known as collateralized debt obligations, that are at the center of the government’s interest.

Sources tell FOX Business that after the SEC initially requested information from all the firms when it began its probe last year, it came back and subpoenaed Citigroup and Deutsche Bank for additional documents, underscoring a heightened level of interest. In the case of Citigroup, the SEC has conducted depositions of senior executives there, these people tell FOX Business. Ironically, the SEC has not asked Morgan Stanley for the same type of additional information since its initial request, even as the Justice Department has begun evaluating the firm's CDO sales.

As of today, neither Citi, Deutsche Bank nor Morgan Stanley have received so-called Wells Notices issued to either firm. A Wells Notice indicates that the commission’s enforcement staff is recommending to the full commission that the firms should be charged with civil securities fraud.

That said, people with knowledge of the matter say the probes are ongoing.

The SEC’s increased interest would also signal that the Justice Department’s probe of the sale of CDOs is actually wider than the two firms in the news as preliminary targets of federal prosecutors, Goldman Sachs and Morgan Stanley. The SEC regularly refers to the Justice Department cases which it considers significant.

The wider interest by the government increases the chances that Wall Street and federal officials may ultimately reach a “global settlement” with the securities industry as it finds a pattern of allegedly improper conduct in the sale of these so-called structured products. In such a settlement, each firm will pay a fine based on the level of alleged misconduct.

The SEC declined to comment on possible investigations into Morgan Stanley, Citi and Deutsche Bank. The banks also declined to comment.

The last high-profile global settlement was crafted by former New York Attorney General Eliot Spitzer and the SEC over Wall Street’s use of fraudulent stock research to entice small investors

into buying Internet stocks, many of which went bust or declined significantly in value during the 2000-2001 collapse of the technology market.

In addition to all the big firms settling the matter with the SEC and Spitzer, two prominent stock analysts, Henry Blodget, formerly of Merrill Lynch, and Jack Grubman, formerly of Citigroup, were also charged and banned from the securities industry. Sources say Grubman is a telecommunications industry consultant, while Blodget has re-emerged as a journalist.