Michael Stravato for The New York TimesGoldman Sachs hired Reid Weingarten, a prominent criminal defense lawyer, as it expects its executives, including Lloyd C. Blankfein, below, to be interviewed by the Justice Department.
Andrew Harrer/Bloomberg News
8:57 p.m. | Updated
Goldman Sachs’s actions during the financial crisis returned to haunt it with a fury on Monday afternoon.
In late trading, shares of Goldman tumbled nearly 5 percent, knocking $2.7 billion off the firm’s market value, after a report that the firm’s chief executive, Lloyd C. Blankfein, had hired a prominent criminal defense lawyer, Reid H. Weingarten.
Goldman, when confirming the hiring, portrayed it as routine, given the several government investigations faced by the firm. But the sharp reaction in the stock price showed the fragile nerves of investors, who are worried that potential legal liability could damage the firm and its earnings power.
A spokesman for Goldman said executives at the firm were expected to be interviewed by the Justice Department. The agency is conducting an inquiry that stems from a 650-page report produced earlier this year by the Senate Permanent Subcommittee on Investigations. That report said that Goldman had misled clients about its practices related to mortgage-linked securities.
“As is common in such situations, Mr. Blankfein and other individuals who were expected to be interviewed in connection with the Justice Department’s inquiry into certain matters raised in the P.S.I. report hired counsel at the outset,” Goldman Sachs said in a statement.
While investors apparently feared the worst on Monday, a person close to the matter said that Mr. Blankfein had not been subpoenaed and that no Goldman executive had received an individual subpoena. Goldman is cooperating with the Justice Department investigation.
Still, Monday’s stock fall underscored just how vulnerable Goldman’s stock would continue to be until the Justice Department and other authorities finished their investigations.
“Until Goldman resolves its legal issues, the company and the stock are vulnerable to all sorts of perceptions, real or perceived,” said Michael Mayo, an analyst with Crédit Agricole Securities.
With about 20 minutes left in the trading day, Reuters, citing an unidentified government source, reported that Mr. Blankfein had hired Mr. Weingarten. Mr. Weingarten has defended Bernard J. Ebbers, the former chief executive of WorldCom, and Mike Espy, a former agriculture secretary. Goldman’s stock price quickly tumbled, falling to its lowest level since March 2009. Its shares closed at $106.51.
The stock move also reflected the support Goldman shareholders had for Mr. Blankfein despite the problems the firm’s problems under his stewardship. At Goldman’s stakeholder meeting in May, shareholders voted 97 percent in favor of his leadership. Any suggestion that Mr. Blankfein’s legal woes were mounting, or that he might leave the firm, would be seen as a negative for the stock.
Goldman investors have been on a roller-coaster ride since April 2010, when the Securities and Exchange Commission accused Goldman of duping clients by selling mortgage securities that were secretly created by a hedge fund firm to cash in on the housing market’s collapse.
Since then, it has been dogged by investigations and speculation about investigations, all of which have taken its toll on stock. Goldman shares were trading near $180 a share before the S.E.C. filed its lawsuit. Goldman settled that suit a few months later, but its troubles were far from over.
This year came the Senate report, which led to a Justice Department inquiry. And in June, Goldman received a subpoena from the office of the Manhattan district attorney, which is also investigating Goldman’s role in the financial crisis.
Mr. Blankfein’s decision to hire his own lawyer is not unusual. Legal experts say that it is now common for a company’s chief executive to retain separate counsel from the corporation. It has become rare for a lawyer or law firm to represent both a company and its executives in a government investigation.
Mr. Weingarten, 61, is considered a skilled trial lawyer, having won acquittals for Mr. Espy, the former agriculture secretary, and Mark A. Belnick, the former general counsel at Tyco. He has also suffered his share of courtroom defeats. Mr. Ebbers, the head of WorldCom, was found guilty and was sentenced to 25 years in prison.
On Monday, Mr. Weingarten was in the Federal District Court in Manhattan with his client Anthony Cuti, the former chief executive of Duane Reade, the drugstore chain. A judge sentenced Mr. Cuti to three years in prison for a scheme to falsely inflate the income and reduce the expense that the company reported. A jury convicted Mr. Cuti in June 2010.
Mr. Weingarten did not respond to request for comment on Monday. A spokeswoman for his law firm, Steptoe Johnson, declined to comment.
Steptoe is not the firm most closely associated with Goldman. The bank’s primary outside law firm is Sullivan Cromwell, a prominent and old-line New York law firm. Sullivan represented the firm in its $550 million settlement with the S.E.C. Also, when Mr. Blankfein testified as a witness earlier this year in the insider trading trial of Raj Rajaratnam, the former hedge fund manager, lawyers from Sullivan coached him on his testimony and accompanied him to court.
A native of Newark, Mr. Weingarten is a graduate of Cornell and the Dickinson School of Law at Penn State. Before becoming a criminal defense lawyer, he spent several years as a deputy district attorney in Pennsylvania and then joined the Justice Department’s Public Integrity Section.
While at the Justice Department, he spent years bringing cases against corrupt politicians and worked with another young prosecutor, Eric H. Holder. Mr. Holder, now the attorney general of the United States, remains one of Mr. Weingarten’s closest friends.
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