Federal prosecutors are now investigating Goldman Sachs for possible criminal charges. The SEC, which cannot file criminal charges, only civil suits, has referred their case to the U.S. Justice Department. At the center of the SEC charges are the activities of Goldman Sachs manager, Fabrice Tourre who was the chief architect for a mortgage-backed security called Abacus 2007 AC-1. Tourre allegedly designed this CDO, collateral debt obligation, with the assistance of hedge fund manager, John Paulson. Paulson’s company took out short positions, credit default swaps, as insurance betting against Abacus. The SEC charges claim that Tourre packaged subprime mortgages in Abacus at the advice of Paulson and that Abacus was designed to fail. Goldman Sachs sold shares of Abacus to clients who accepted the risk involved to profit should the subprime market recover.

The history of Federal criminal prosecution against Wall Street firms is mixed. Typically, it is the ‘kiss of death’ and few companies remain in business following prosecution. The accounting giant, Arthur Anderson LLC was initially found guilty for aiding Enron in fudging their books. While the U.S. Supreme Court later overturned the conviction, the damage had already been done. In the late 1990s, Prudential Securities was also investigated by the Federal government, however, Prudential arranged for a deferment where criminal charges were put on hold for three years. After this period, the charges were dropped as no further wrong doing was practiced under the watchful eye of the government.

More recently, Federal cases against executives of Bear Stearns failed to get convictions. But, again, as in the case of Arthur Anderson, the damage was done and Bear Stearns had already died as a corporation. The SEC’s civil case against Goldman Sachs has a lower threshold for a ‘burden of proof’ than if the Justice Department attempts to file criminal charges. Probably the one person who has the most to worry about is Fabrice Tourre, named in the SEC charges. During this week’s Senate hearings, Tom Coburn (R-OK) questioned Goldman Sachs CEO Lloyd Blankfein as to why the company released emails of Tourre? Blankfein said under oath that he was “far removed” from any decision to do such. One can guess that Tourre has been thrown under the bus and is being offered as a rouge agent to be sacrificed on the Alter of Finance.