Byline: Michael Hirsh
A prosecutor best known for putting terrorists behind bars is about to take on one of the biggest challenges of his career--proving Goldman Sachs committed fraud.
Robert Khuzami spent seven years making big bucks at Deutsche Bank, but it's tough to find any mementos of his time there. Instead, Khuzami's office at the Securities and Exchange Commission is decorated with souvenirs of his earlier incarnation as a U.S. prosecutor, the man who helped put Omar Abdel-Rahman behind bars after the 1993 World Trade Center bombing. On his office walls Khuzami has hung two framed court drawings of him taking on the "blind sheik."
Now Khuzami, the SEC's director of enforcement, is pursuing what could be an even more challenging prosecution, although it isn't a criminal case. He is trying to prove that Goldman Sachs defrauded its clients by selling them a complex, mortgage-backed security that was secretly designed to plummet in value, all so "short-sellers" would make a bundle on the market drop. The investment bank, which has called the SEC civil fraud charges "completely unfounded," is scheduled to deliver its formal response in court on July 19.
Proving that Goldman committed fraud is going to be hard, many experts say. Goldman and other firms have argued that sophisticated investors knew the risks involved in such deals, and information that short-sellers helped to create the trade wasn't "material" to anyone's investment decisions. But Khuzami badly needs a win: investigations of major Wall Street figures complicit in the subprime mortgage scandal have been running aground a lot lately.
In recent weeks the SEC and Justice Department, lacking evidence of fraud, declined to file charges against Joseph Cassano, the former AIG financial products chief whom the writer Michael Lewis once called "the man who crashed the world." (Cassano, in testimony to …