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NY Prosecutors Probe Goldman

Goldman Sachs Chairman and CEO Lloyd Blankfein
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Goldman Sachs Chairman and CEO Lloyd Blankfein

New York prosecutors have delivered a subpoena to Goldman Sachs seeking information on the investment bank's mortgage and derivatives business, a person familiar with the matter said.

The Manhattan District Attorney's office is looking into allegations made by the US Senate's Permanent Subcommittee on Investigations related to Goldman's role in the financial crisis. The subcommittee alleged that Goldman put its own interest ahead of their clients' and dumped bad mortgage linked derivatives on counter-parties. The committee's report said Goldman "misled investors and created conflicts of interest as the company built short positions before the U.S. housing market collapsed."

Goldman has said in the past that its short positions were hedges against long positions, rather than a one-way call on the direction of the housing market.

When Goldman executives testified before the subcommittee, which is chaired by Senator Carl Levin, they repeatedly insisted that the company was hedging rather than "betting."

But this testimony conflicted with that of former Goldman trader Josh Birnbaum, one of the chief architects of Goldman’s short strategy. He testified that Goldman was not hedging with its short positions.

During the press conference announcing the subcommittee's report in April, Senator Levin said that he would refer the executive's testimony to the Justice Department for "possible perjury charges." Federal prosecutors are understood to be investigating possible perjury charges.

"We don't comment on specific regulatory or legal issues, but subpoenas are a normal part of the information request process and, of course, when we receive them, we cooperate fully," Goldman said in a statement.

A subpoena is an informational request and not necessarily a prelude to a criminal investigation. The Manhattan District Attorney's office has a long history of prosecuting financial wrong-doing.

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