Two of America's leading newspapers yesterday reported that a criminal investigation had begun into several Wall Street banks over whether they had misled either investors or ratings agencies about mortgage bond deals. The New York Times reported that Andrew Cuomo, the New York attorney general, had begun an investigation into eight banks to determine whether they provided misleading information to agencies that rate mortgage securities.
His office issued subpoenas late on Wednesday notifying the banks of his investigation, the Times reported on its website, citing two people with knowledge of the investigation. According to the report, the targets are Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Credit Agricole and Merrill Lynch, now owned by Bank of America. The inquiry by Mr Cuomo suggests he thinks the rating agencies may have been duped by one or more of the targets of his investigation, the report said.
The Times said spokesmen for Morgan Stanley, Credit Suisse and Deutsche Bank declined to comment and other banks did not immediately respond to requests for comment. The companies that rated the mortgage deals were Standard & Poor's, Fitch Ratings and Moody's Investors Service, the report said. Mr Cuomo was also interested in ratings agency employees hired by bank mortgage desks to help create mortgage deals that received better ratings than they deserved, the newspaper reported, citing the sources, who were not authorised to discuss the matter publicly.
Separately, The Wall Street Journal reported that US federal prosecutors and the Securities and Exchange Commission (SEC) were conducting a preliminary criminal investigation into whether banks misled investors about their participation in mortgage-bond deals. JPMorgan Chase, Deutsche Bank, UBS and Citigroup had received civil subpoenas from the SEC, the Journal reported. Goldman Sachs Group and Morgan Stanley were already being investigated under similar preliminary criminal scrutiny, the newspaper said.
Wall Street companies are facing scrutiny from prosecutors and politicians over whether they improperly sold collateralised debt obligations linked to the subprime mortgages that caused the credit crisis. Goldman Sachs is contesting a lawsuit from the SEC, which alleges the company misled investors about a mortgage-linked security in 2007. Prosecutors are gathering evidence and have not issued criminal subpoenas or determined the outlines of any potential case, according to the Journal. To win a criminal case, the prosecutors would have to prove beyond a reasonable doubt that a company or its employees intentionally misled investors, it reported.
UBS, Citigroup and Deutsche Bank declined to comment on the report, as did the Manhattan US attorney's office, the SEC and Goldman Sachs, the Journal said. Morgan Stanley told the newspaper it had not been contacted by prosecutors and had done nothing wrong. A spokesman for JPMorgan said the bank "hasn't been contacted" by federal prosecutors and wasn't aware of any criminal investigation. James Gorman, the chief executive of Morgan Stanley, on Wednesday denied allegations the US bank misled investors about mortgage derivatives it sold. The Journal reported the company was being investigated by US prosecutors over whether it misled clients when it sold them collateralised debt obligations as its own traders bet that the value of the securities would drop.
The investigation has stemmed from an ongoing civil fraud investigation of more than a dozen Wall Street companies' mortgage bond businesses by the SEC that began last year, the Journal reported. Mr Cuomo's office is conducting a criminal investigation into some of those companies' activities, it said. Government officials in the US are seeking to assuage public anger over bank bailouts by tightening regulations after the financial crisis. The changes are intended to prevent a repeat of the global downturn that led to US$1.78 trillion (Dh6.53tn) in write-downs and losses by financial firms.
* with Reuters and Bloomberg