Under Scrutiny, Goldman Offers to Speed Metal Delivery

Under scrutiny for the long waits that have cost manufacturers — and ultimately consumers — many millions of dollars, Goldman said on Wednesday that its warehouse unit, Metro International Trade Services, would give customers who store aluminum at the warehouses immediate access to their metal.

Through Metro International, Goldman stores vast amounts of aluminum in and around Detroit. An investigation by The New York Times found that Metro routinely shuffled tons of the metal from one warehouse to another, a tactic that profited Goldman but pushed up the price of aluminum across much of the nation.

Goldman also said on Wednesday it would suggest ways to improve the metal storage system, whose rules are dictated by the London Metal Exchange.

Regulators at the Commodity Futures Trading Commission are examining practices at warehouse operations controlled by financial firms and trading houses such as Glencore Xstrata, the Noble Group and Goldman. These operations store aluminum for companies like Coca-Cola and MillerCoors, as well as for speculators.

Congress has taken an interest in the issue as well. Earlier this month, the Senate Banking Committee convened hearings on Wall Street’s push into the physical commodities markets and whether its involvement had raised prices. The Senate Permanent Subcommittee on Investigations, led by Carl Levin, a Michigan Democrat, has also been privately questioning big banks like Goldman, JPMorgan Chase and Morgan Stanley on their commodities businesses.

In Congressional testimony on Tuesday, Mary Jo White, the chairwoman of the Securities and Exchange Commission, said she had asked the agency’s staff to examine the issue.

Goldman said its offer to speed up delivery of metal was open only to industrial customers of its Metro warehouses. If a customer wants immediate delivery of its metal, Goldman said it would go into the open market and buy the amount requested, then swap it to the customer. Goldman said it would pay the difference between the market cost and the higher price that includes the storage premium. Goldman said none of its customers had taken up its offer yet.

Goldman also said that it supported recent efforts at the London exchange to increase the amount of metal allotted for delivery from its large warehouses, like those owned by Metro.

Last week, in the face of rising regulatory concerns about the big banks’ commodities operations, JPMorgan said it was looking to sell its physical commodities businesses, which include sprawling storage and transportation facilities. But Goldman does not appear to be following suit.

In a television interview on Wednesday, Gary D. Cohn, Goldman’s president, said the bank had no immediate plans to sell Metro International. Under the terms of the regulatory exemption provided to Goldman when it bought Metro, the bank has until 2020 to sell it.

DealBook: S.E.C. Hopes for Validation in Goldman Sachs Trader Case

Mike Segar/ReutersFabrice Tourre, formerly of Goldman, faces claims that he was part of a conspiracy to mislead investors on a mortgage security.

Three years ago, in the shadow of the financial crisis, some of the biggest banks on Wall Street slipped into the government’s cross hairs.

Now, after striking nine-figure settlements with firms like Goldman Sachs and JPMorgan Chase, the government’s campaign to punish Wall Street over risky investments sold before the crisis will culminate in an unlikely way — with the civil trial of a 34-year-old Frenchman, Fabrice P. Tourre.

In a federal courtroom in Lower Manhattan next week, the former midlevel Goldman employee will fight the Securities and Exchange Commission’s claim that he was part of a conspiracy to mislead investors when selling a mortgage security that ultimately failed. Mr. Tourre, a trader stationed in the bowels of Goldman’s mortgage machine when the S.E.C. thrust him into the spotlight, is one of only a handful of employees at big Wall Street firms to land in court over the crisis.

The rarity of the trial underpins its importance. For Mr. Tourre, who is now enrolled in a doctoral economics program at the University of Chicago, an unfavorable verdict could yield a fine, or worse, a ban from the securities industry. A victory in court, however, would offer only belated consolation to Goldman, which is paying for his defense. For the S.E.C., an agency still dogged by its failure to thwart the crisis, the trial is a defining moment that follows one courtroom disappointment after another.

When a jury cleared a midlevel Citigroup employee in a mortgage-bond trial, the S.E.C. took measures to buoy its case against Mr. Tourre. For one, it talked to a private jury consultant, people briefed on the matter said, though it is unclear whether the agency hired the firm. The head of the agency’s trial team is also leading the Goldman case himself, a surprising move.

“Their reputation for trying cases hangs in the balance,” said Thomas A. Sporkin, who was a senior S.E.C. enforcement official until last year when he departed for the law firm Buckley Sandler. “This is their opportunity to show Wall Street that they can prevail against an individual at trial.”

Both sides were in court Tuesday sparring over what the jury should — and shouldn’t hear. The judge, Katherine B. Forrest, ruled that the defense can question a crucial S.E.C. witness, a woman who was an executive of a company that helped arrange the mortgage security, about the agency’s eve-of-trial decision to drop an unrelated investigation against her, a reprieve Mr. Tourre’s lawyers have argued might color her testimony.

The S.E.C. also walked away with a major victory: Judge Forrest permitted the agency to argue that Mr. Tourre was part of larger conspiracy at Goldman, a move that will allow evidence beyond Mr. Tourre’s actions.

Yet even if it secures a victory at trial, the S.E.C. will probably face scrutiny all the same, as critics question why the agency chose to make Mr. Tourre the face of the financial crisis. Rather than take aim at a high-flying executive, the agency filed its most prominent crisis-era case against someone barely known on Wall Street, a concern that also hampered the Citigroup case, when the foreman of the jury asked, “Why didn’t they go after the higher-ups rather than a fall guy?”

An S.E.C. spokeswoman declined to comment. But in the past, the agency has defended its actions tied to the crisis, noting that it has sued 66 C.E.O.’s and other senior officers in such cases, including a few executives from Wall Street and major mortgage lenders.

When the S.E.C. filed its case against Goldman and Mr. Tourre in April 2010, the allegations shook the bank. Within months, it agreed to pay a $550 million fine, without admitting or denying guilt, then the largest penalty ever levied on Wall Street.

Mr. Tourre, however, rejected a deal on the eve of Goldman’s settlement, people briefed on the matter said. The deal, the people said, would have required Mr. Tourre to face a lifetime ban from the securities industry and a cash penalty — virtually the same punishment he would face if found liable at trial. The agency has not offered to settle since.

At the heart of the agency’s case is the contention that in 2007 Mr. Tourre and Goldman sold investors a mortgage security, known as Abacus, without disclosing a crucial fact: a hedge fund run by the billionaire John A. Paulson helped construct Abacus and then bet against it. The S.E.C. cited Goldman for “misstating and omitting key facts” about Mr. Paulson’s involvement. When the mortgage market soured, a German bank and a handful of other sophisticated investors lost more than $1 billion on the deal.

“The S.E.C. essentially argues that Tourre handed Little Red Riding Hood an invitation to grandmother’s house while concealing the fact that it was written by the Big Bad Wolf,” Judge Forrest explained in a recent ruling.

To win its case, the S.E.C. must show by a preponderance of the evidence that Mr. Tourre “committed a fraudulent act that was material.” The verdict is likely to hinge on whether the S.E.C. can prove what it called two basic acts of “deception” stemming from January 2007, when Mr. Paulson’s hedge fund asked Goldman to create an investment worth betting against.

What led to the first misstep, according to the S.E.C., was Goldman’s decision to use ACA Management to pick the underlying mortgage bonds for the investment. ACA worked closely with Mr. Paulson’s hedge fund in the selection process, the S.E.C. said.

But in a marketing document that Goldman submitted to investors, the bank said the portfolio was “selected by ACA,” with no mention of Mr. Paulson.

Mr. Tourre’s lawyers, however, are expected to note that it was unheard-of for any Wall Street bank to disclose the name of the hedge fund betting against an investment. And e-mails reviewed by The New York Times suggest that the main investor in Abacus, the German bank IKB Deutsche Industriebank, knew the contents of the deal and possibly even removed certain bonds from its makeup. In the two March 2007 e-mails, Goldman employees sent three “replacement” bonds to an IKB executive, saying “hopefully these will work.”

In turn, the S.E.C. is expected to outline a second possible misstep by Mr. Tourre tied to his dealing with ACA. Mr. Tourre, the S.E.C. said, misled ACA into thinking that Mr. Paulson was investing in the bonds rather than betting against it. In a January 2007 e-mail, Mr. Tourre falsely told ACA that one chunk of Abacus was “pre-committed,” meaning that an unnamed investor already agreed to buy it. In a deposition, he later acknowledged that his e-mail “could have been more accurate.”

ACA, the S.E.C. said, interpreted Mr. Toure’s e-mail to mean that Mr. Paulson was the unnamed investor. And when that impression was conveyed to Mr. Tourre in an e-mail, according to the S.E.C., he failed to immediately correct it.

ACA’s chief executive later told the S.E.C. that he “would not have voted to approve” his company’s involvement in Abacus had he known of Mr. Paulson’s strategy.

Yet Mr. Tourre’s lawyers will argue that if ACA did not know of Mr. Paulson’s bet against Abacus, it should have. ACA, the lawyers note, was a sophisticated player and met separately with Mr. Paulson’s team to discuss the Abacus deal. Goldman, the lawyers argue, also sent ACA “a steady stream” of documents correcting Mr. Tourre’s misstatement.

“Fabrice Tourre has done nothing wrong. He is confident that when all the evidence is considered, the jury will soundly reject the S.E.C.’s charge,” his lawyers, Pamela Chepiga and Sean Coffey, said in a statement.

The defense received additional ammunition on Tuesday when Judge Forrest ruled that the S.E.C. could not fully block mention of newspaper articles from 2007 that discussed Mr. Paulson’s penchant for betting against the mortgage market.

The judge has yet to rule on whether to allow the S.E.C. to introduce some of the case’s most colorful e-mails, notably one where Mr. Tourre says a friend had nicknamed him “Fabulous Fab,” and jokes that he sold toxic real estate bonds to widows and orphans.

DealBook: Former Goldman Sachs Partner Fined for Unauthorized Trades

Goldman SachsGlenn Hadden

Goldman Sachs and Glenn Hadden, one of Wall Street’s top traders, have been fined by the CME Group over a Treasury futures trade in 2008.

The CME Group, which runs commodity and futures exchanges, has notified both Goldman and Mr. Hadden, once a trader and partner at Goldman Sachs who now runs the global interest rates desk at Morgan Stanley, that both face fines and other sanctions in connection with the trade, according to a disciplinary action reviewed by The New York Times.

Goldman has been ordered to pay $875,000 and was cited for failure to supervise Mr. Hadden. Mr. Hadden has been ordered to pay $80,000.

He faces a 10-day suspension, starting July 15, from “directly accessing all CME Group Inc. trading floors, and indirect and direct access to all electronic trading and clearing platforms owned or controlled by CME Group Inc.”

Mr. Hadden is one of the highest-paid professionals at Morgan Stanley and has been known throughout his career for aggressive and profitable risk-taking. As The Times reported in December, it is unusual for someone of Mr. Hadden’s stature to be the target of such an investigation.

Mr. Hadden joined Morgan Stanley in 2011. He was hired after Goldman Sachs, which had concerns about some of his trading activity, put him on leave in 2009. Those concerns included the episode involved in the sanction.

Mr. Hadden, according to the CME disciplinary action, in the last minutes of trading on Dec. 19, 2008, engaged in trading that violated CME rules.

Mr. Hadden, the CME Group said, was trying to cover some market risk associated with a position he had just before the day’s close. He had difficulty with the trade because the market was quite illiquid, and was found to have not unwound the position in an orderly manner. Goldman was fined over failing to supervise Mr. Hadden.

A spokesman from Goldman Sachs said the firm was happy to have the matter resolved. A Morgan Stanley spokesman said “Mr. Hadden is an employee in good standing as the global head of rates at Morgan Stanley.”

James Benjamin, a lawyer for Mr. Hadden, said his client was also glad the matter was settled. “This matter arose from standard risk-management procedures for Treasury note futures contracts. Although Mr. Hadden acted in good faith and attempted to follow a textbook approach, he had difficulty liquidating the futures position in an orderly manner in light of stressed and illiquid market conditions.”

The disciplinary action is likely to increase speculation about Mr. Hadden’s future at Morgan Stanley. Last week his boss, Kenneth M. deRegt, the executive in charge of Morgan Stanley’s fixed income department, announced he was retiring. That set off speculation inside Morgan Stanley that Mr. Hadden might also leave, or see his responsibilities diminished.

However, people close to the firm who spoke on the condition of anonymity because they were not authorized to speak on the record about a personnel matter, say there are no plans to move or sever ties with Mr. Hadden.

Mr. Hadden was a big hire for Morgan Stanley, and was brought in just as the firm was working to rehabilitate its fixed income department. That unit, where Mr. Hadden now works, was badly bruised during the 2008 financial crisis.

DealBook: Fallen Goldman Director Appeals for a New Trial

Spencer Platt/Getty ImagesRajat Gupta, center, left court in October after being sentenced to two years in prison. He was convicted of leaking confidential information to Raj Rajaratnam, a hedge fund manager.

8:28 p.m. | Updated

It was perhaps the most critical piece of evidence in the trial of Rajat K. Gupta, a former Goldman Sachs director found guilty last year of leaking the bank’s boardroom discussions to his hedge fund friend.

“I heard yesterday from somebody who’s on the board of Goldman Sachs that they are going to lose $2 per share,” his friend, the money manager Raj Rajaratnam, told a colleague during an October 2008 conversation that federal investigators secretly recorded.

On Tuesday, a lawyer for Mr. Gupta argued that a federal appeals court should overturn his client’s conviction and grant a new trial because the verdict was tainted by the erroneous admission of that statement and other wiretapped conversations.

“The wiretaps should never have been admitted,” said Mr. Gupta’s lawyer, Seth P. Waxman, during the argument at the United States Court of Appeals for the Second Circuit in Manhattan.

Last June, a jury convicted Mr. Gupta, 64, of sharing Goldman’s confidential information with Mr. Rajaratnam. The presiding trial court judge, Jed S. Rakoff, sentenced Mr. Gupta to two years in prison. A year earlier, Mr. Rajaratnam was found guilty at trial and given an 11-year sentence. His appeal is also pending.

The men, who came to this country from South Asia as university students and rose to the highest ranks of business, are two of the most prominent figures caught up in the government’s crackdown on illegal conduct on Wall Street trading floors. Since 2009, the United States attorney in Manhattan has charged 81 individuals; of those, 73 have either pleaded guilty or been convicted.

With his freedom hanging in the balance, Mr. Gupta attended Tuesday’s hearing, accompanied by his wife, his four daughters and about a dozen friends. He was once one of the world’s most admired executives, having served for a decade as the global chairman of the management consultancy McKinsey & Company. Mr. Gupta, who lives in Westport, Conn., is free on bail pending the outcome of his appeal.

The hearing, in a cramped courtroom in the stately old federal courthouse building on Foley Square, was packed with spectators. About two dozen summer law school interns from Mr. Waxman’s firm, WilmerHale, came to watch, as did a class of curious high school students from the Beacon School on the Upper West Side. The youth-filled courtroom pushed several members of Mr. Gupta’s large legal team and a group of senior government prosecutors into a crowded anteroom, where they watched a televised simulcast of the proceeding.

Mr. Waxman tried to convince the three-judge panel — Jon O. Newman, Amalya L. Kearse and Rosemary S. Pooler — that the lower court had made a series of incorrect rulings at trial. Much of the discussion centered on a ruling by Judge Rakoff that curtailed the testimony of Mr. Gupta’s daughter Geetanjali Gupta. She had planned to testify that at the time of the tips cited by prosecutors, her father told her that he believed Mr. Rajaratnam had stolen money from him.

Judge Rakoff curbed her testimony, allowing her to say only that her father was upset with Mr. Rajaratnam. If the jury had heard that Mr. Rajaratnam might have cheated Mr. Gupta, “that testimony would have powerfully refuted the government’s theory of motive,” Mr. Waxman argued.

Judge Newman appeared skeptical that the daughter’s testimony would have swayed the jury given the substantial circumstantial evidence of Mr. Gupta’s guilt.

“You’re telling me that if the jury had heard that statement it would have disregarded all the other evidence in the case?” Judge Newman asked. “How realistic is that?”

Later in the argument, Judge Newman recounted damning evidence from the trial — phone logs and trading records indicating that less than one minute after hanging up from a Goldman board call, Mr. Gupta phoned Mr. Rajaratnam, who quickly bought about $35 million worth of Goldman stock.

“Are you telling us that that’s a coincidence?” Judge Newman asked.

Mr. Waxman tried to avoid answering the question, but Judge Newman persisted. “O.K., I embrace it — it’s a coincidence,” said Mr. Waxman, a former solicitor general of the United States who is considered one of the country’s top appellate lawyers.

Richard C. Tarlowe, the federal prosecutor who argued the appeal for the government, seized upon Judge Newman’s incredulity when he rose to speak. “The argument” — that the phone calls and trades were coincidental — “was made to the jury, and it was rejected because of its absurdity,” he said.

For Mr. Gupta to have his conviction reversed, the appeals court does not have to believe in his innocence. Rather, he can win a new trial if the judges decide that Judge Rakoff improperly admitted the wiretapped conversations between Mr. Rajaratnam and his colleagues suggesting that he had an inside source at Goldman, or made other faulty rulings.

“The court’s decidedly asymmetrical interpretation of the rules of evidence left the jury with a distorted picture, in which Gupta was accused by the self-serving hearsay of a known fabulist,” Mr. Gupta’s legal team wrote in court papers.

During the argument, Mr. Waxman characterized Mr. Rajaratnam’s statements as unreliable, and described him as a braggart who “lied about his sources to impress his subordinates.”

A ruling by the appeals court is expected in the coming months. One party closely watching for a decision is Goldman Sachs, which had a lawyer attend Tuesday’s hearing. In February, a judge ordered Mr. Gupta to pay Goldman more than $6.2 million to reimburse the bank for legal expenses related to an internal investigation and other costs. But because the bank’s bylaws require it to cover legal fees for top officers and directors, Goldman is paying for Mr. Gupta’s costly defense, which has reached at least $35 million.

Mr. Gupta agreed to reimburse the bank for his legal bills if a jury convicted him, but Goldman must continue to pay them until the final outcome of his appeal.

This post has been revised to reflect the following correction:

Correction: May 22, 2013

An earlier version of this article misstated the timing of Rajat Gupta's conviction. It was in June 2012, not May 2012.

Common Sense: ‘Why I Left Goldman Sachs,’ by Greg Smith, Falls Short

Mr. Smith’s letter clearly hit a popular nerve, coming as it did during a devastating financial crisis in which Goldman emerged as the rich, arrogant and unfeeling perpetrator of much of the financial wreckage still afflicting Americans. And it’s hard to quarrel with Mr. Smith’s overriding message: Wall Street should put clients interests’ first or risk oblivion. Indeed, that was Goldman Sachs’s own credo, “Our clients’ interests always come first.”

But stripped of its incendiary conclusions, Mr. Smith’s manifesto was curiously short on facts. Other than the now-infamous reference to muppets — “I have seen five different managing directors refer to their own clients as ‘muppets,’ sometimes over internal e-mail” — there were no examples of a toxic culture at work, no actual names of morally bankrupt people and no examples of a client getting ripped off. Mr. Smith declined to elaborate after the article was published, heightening suspense and no doubt fueling the literary bidding that reached a reported $1.5 million for a book that would deliver the goods.

That book, “Why I Left Goldman Sachs,” goes on sale on Monday. Despite tight security, copies of the book have been circulating, and I read one. The book not only fails to deliver concrete examples to back up his sweeping conclusions, but he admits changing “names or descriptors” for some (but not all) people and acknowledges that what he does disclose is “from memory.”

He says he has tried “to retain the spirit” of what actually occurred. This makes it nearly impossible to verify much of what he says.

Beyond that, from his perch on the equity trading desk he seems to have had a narrow view of the institution where he worked for nearly 12 years. His disillusionment comes across as heartfelt, but much of it seems to have come less from his own experiences than from news reports about the firm’s behavior in deals he wasn’t involved in.

Mr. Smith’s book might even bolster Goldman’s reputation. After all, if Mr. Smith is the ultimate insider, and this is as bad as it gets — Mr. Smith in a hot tub at the Mandalay Bay Hotel in Las Vegas with a topless woman — then he hasn’t made much of a case.

But Mr. Smith isn’t in much of a position to exonerate Goldman, either. The firm was deeply enmeshed in nearly all aspects of the financial crisis and its causes, including mortgage-backed securities. And after an injection of taxpayer support, it managed to profit handsomely and pay the lavish bonuses that Mr. Smith shared in. But you won’t find that story in “Why I Left.”

Mr. Smith declined to discuss any of this before his scheduled appearance on Sunday on “60 Minutes.” Goldman Sachs responded to some of my questions with copies of parts of their internal investigation and made several employees available.

Potential problems with Mr. Smith’s approach surface almost immediately. The first paragraph of Chapter 1 describes “an intern named Josh” who’s being “grilled” and asked to explain risk arbitrage but “was floundering badly.” Josh, Mr. Smith adds, is the son of a billionaire.

There was no “Josh” in Mr. Smith’s group of interns, and only one son of a billionaire: Teddy Schwarzman, son of Stephen Schwarzman, the chairman and chief executive of the asset management firm Blackstone Group.

“I was never grilled on risk arbitrage, or asked to give a presentation on it,” Mr. Schwarzman said when I contacted him this week. “I realize it was a long time ago, but I would certainly have remembered it if I had floundered.” Nor did anyone else in the class I spoke to recall such an episode.

DealBook: Goldman Sachs Swings to Profit as Revenue Surges

Mark Lennihan/Associated PressLloyd Blankfein, chief of Goldman Sachs.

Goldman Sachs said on Tuesday that it swung to a profit in the third quarter, a strong comeback from a year ago, when it reported a rare quarterly stumble in the wake of losses in its private equity portfolio and broader global economic issues.

For the quarter, the firm reported net earnings applicable to common shareholders of $1.46 billion, or $2.85 a share, compared with a loss of $428 million, or 84 cents a share, in the quarter a year earlier.

Goldman’s revenue more than doubled, to $8.35 billion, from $3.59 billion in the year-ago period. The results exceeded the consensus of Wall Street analysts surveyed by Thomson Reuters.

“This quarter’s performance was generally solid in the context of a still challenging economic environment,” Lloyd C. Blankfein, Goldman’s chairman and chief executive, said in a statement.

The better-than-expected performance is welcome news for Goldman, which has had a tough year as it has struggled against both economic challenges at home and abroad and new regulations that have reduced profitability.

Goldman is not alone in feeling the profit pinch, and this quarter its rivals were aided by revenue from a boom in mortgage refinancing, a corner of the market in which Goldman does not have a big presence.

Still, net revenue in Goldman’s powerful fixed income, currency and commodities unit came in at $2.22 billion, 28 percent higher than the third quarter of 2011. The company said the increase reflected “significantly higher” revenue from trading in mortgages as well as a bump in revenue from trading items like currencies and interest-rate products.

During the first half of the year the firm earned roughly $3 billion in profit, down 20 percent from the same period last year.

The results also included a bump in the firm’s quarterly dividend, which the board recently voted to increase by 4 cents, to 50 cents a share.

Goldman’s annualized return on equity, a critical measure of profitability which effectively measures the profits a bank was able to generate on its capital, was 8.6 percent in the quarter. This is roughly the same as this time last year and up from 5.4 percent in the second quarter.

Still, Goldman’s single-digit return on equity is a stark reminder of how much more difficult today’s operating environment is. In 2006, its return on equity was 32.8 percent.

The firm set aside $3.68 billion, or 44 percent of its revenue, to pay employees. This is in line with previous accruals. The firm does not actually pay much of that out until early 2013, after it knows the year-end performance.

At the end of September Goldman had 32,600 staff consultants and temporary workers on the payroll, down 5 percent from a year ago. Goldman and its rivals have been moving to cut staff to make up for revenue shortfalls in a number of areas.