SEC probe widens: Deutsche, UBS and Merrill now feeling the heat

Goldman Sachs CEO Lloyd Blankfein may not be the only one in the glare of the Securities and Exchange Commission's spotlight.

After slapping Goldman with fraud charges Friday, the SEC is now investigating transactions structured by other big players in the mortgage-securities market, including Deutsche Bank, UBS and Merrill Lynch.

The Wall Street watchdog's probes likely center on whether anyone at the banks failed to disclose important aspects of these transactions to investors, the linchpin of the SEC's case against Goldman.

Like Goldman, Deutsche, UBS and Merrill, now part of Bank of America, were active in structuring collateralized debt obligations that used subprime mortgages as collateral.

Many of these transactions were tailor-made for investors like billionaire hedge-fund king John Paulson, who helped structure deals and bought them with the intent of betting against their performance.

News that the SEC is expanding its probe of CDO deals comes as the agency's chairman, Mary Schapiro, and her enforcement chief, Robert Khuzami, face the greatest test of their careers with the Goldman case.

"Given the allegations here, if they get rejected, it could destroy their careers," said one former SEC official. "I think this is a bet-the-farm, break-the-bank type bet for both sides."

If successful, Schapiro and Khuzami will be credited with having bagged a whale of an opponent, a firm that has been at the center of speculation and suspicion, but has never been tagged.

The SEC could use the win. Ever since the financial crisis unfolded, the agency has been portrayed as having been asleep at the switch, missing red flags in the Bernie Madoff Ponzi scandal, and, according to another report issued Friday, flubbing chances to go after Texas financier R. Allen Stanford, who's also accused of running a Ponzi scheme.

And when the agency actually has gone after firms or people, it's logged few successes. It lost an insider-trading case against billionaire loudmouth Mark Cuban, and last year it was forced back to the drawing board in a settlement with Bank of America over claims the financial giant misled investors about its merger with Merrill.

The SEC received another black eye when it was revealed that a number of employees and contractors were spending more time checking out online porn than identifying Wall Street malfeasance.

The Goldman case isn't likely to be a slam-dunk. Sources say Blankfein, who's said to be miffed that he was caught off-guard by Friday's suit, plans to "fight [the SEC's charges] to the death."

The SEC's suit centers on claims that the gold-plated firm misled investors about collateralized debt obligations by failing to inform them that Paulson cherry-picked the loans used to back the CDO with the intent of betting against them.

In addition to the firm, a Goldman vice president, Fabrice Tourre, is named in the SEC's suit. Goldman has said the SEC's claims are "completely unfounded in law and fact."

[Source: By Kaja Whitehouse, New York Times, 19Apr10]

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