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SEC Issues Subpoenas in Banking Probe

Debra Borchardt

The Securities and Exchange Commission has reportedly subpoenaed Goldman Sachs(GS Quote) and other top banks and hedge funds in its probe into the rumor mongering that has hammered Wall Street's biggest banks during the credit crunch.

Bloomberg, citing three people with knowledge of the matter, said the SEC's enforcement division has demanded trading records and emails from Goldman, Deutsche Bank(DB Quote) and Merrill Lynch(MER Quote) as they probe possible manipulation of Bear Stearns and Lehman Brothers(LEH Quote) stock.

The Wall Street Journal had earlier reported that more than 50 hedge funds, including SAC Capital Advisors and Citadel Investment Group, also have received subpoenas.

The collapse of Bear Stearns's stock led to its fire sale to JPMorgan Chase(JPM Quote) in March, while Lehman has relentlessly been hammered by rumors about its liquidity position, sapping the stock of more than 80% of its value over the past year. SEC Chairman Christopher Cox on Tuesday said the regulator would crack down on naked short-selling of government-sponsored mortgage giants Fannie Mae(FNM Quote) and Freddie Mac(FRE Quote), as well as broker-dealers like Lehman.

Trading documents reviewed by the Journal indicate that Goldman Sachs' European trading units were the most active parties in trading credit default swaps -- essentially insurance policies on debt defaults -- that it had bought from or sold to Bear Stearns. Moreover, Goldman's money-management division exited a number of swaps on behalf of clients, the documents show.

According to the paper, Goldman, which strongly denied wrongdoing, never altered its terms for doing business with Bear even as lenders pulled their financing and some trading partners retreated during the troubled securities firm's struggles in early March.

Ex-Bear Stearns CEO Alan Schwartz and Lehman CEO Richard Fuld separately confronted Goldman CEO Lloyd Blankfein about the rumors about the firm's potential role, the Journal reported.

Goldman Sachs benefited from the downfall of Bear Stearns as it picked up a large amount of prime brokerage business. Sources at the former Bear Stearns had previously confirmed that Goldman Sachs was only too eager to assist hedge funds in moving money out of Bear.

A JPMorgan spokesman declined to comment. CEO Jamie Dimon, however, last week expressed support for the SEC probe. "I think the Securities and Exchange Commission should investigate it, okay?" Dimon said. "I think if someone knowingly starts a rumor or passes on a rumor, they should go to jail."

Goldman Sachs did not return a phone call.

Hedge fund Paulson & Co., run by former Bear executive John Paulson, is said to be in the group that reduced its exposure to Bear. A spokesman for Paulson would not say if the firm -- which produced 550% returns last year largely though its short bets against subprime mortgages -- received a subpoena.

Spreading rumors one knows to be false with the intention of manipulating a public company's price is illegal.

On Monday, NYSE Regulation Inc., the regulatory unit of stock-exchange parent NYSE Euronext(NYX Quote), sent a letter to a number of its "largest member firms" asking for information regarding the firm's policies surrounding the circulation of false and misleading rumors. The letter gives the firms a July 28 deadline in which to deliver the materials and said the review was being coordinated with the Financial Industry Regulatory Authority, a Wall Street self-regulatory agency.