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Already facing investigations on two fronts into
its practices in the mortgage market, Goldman
Sachs came under pressure from investors as well on Friday.

After reports on
Thursday evening that federal prosecutors had opened an investigation into
trading at Goldman, raising the possibility of criminal charges against the
Wall Street giant, the firm’s stock was downgraded on Friday by two analysts. Standard
& Poor’s lowered its rating from hold to sell, and Bank
of America Merrill
Lynch dropped its rating from buy to neutral, citing the mounting
investigations.

Investors
responded by sending the stock down 9 percent in midday trading, to $145.89,
contributing to an overall decline in financial shares on Wall Street.

The financial
impact of Goldman’s troubles continues to mount. Since the Securities
and Exchange Commission announced on April 16 that it had filed a
civil fraud suit against the firm, its stock is down 20 percent, removing
about $20 billion from its market capitalization. The drop is all the more
striking given that Goldman delivered a blockbuster
quarterly report last week, with first-quarter earnings doubling from last
year.

Goldman has
vigorously denied the accusations by the S.E.C., which accused the firm of
defrauding investors involved a complex mortgage deal known as Abacus 2007-AC1.

On Thursday
evening, people familiar with the matter said the S.E.C. had referred its
investigation to prosecutors for the Southern District of New York, which has
now opened its own inquiry. While the investigation was said to be in a
preliminary stage, the move could escalate the legal troubles swirling around
Goldman.

Federal
prosecutors would face a higher bar in bringing a criminal case against
Goldman, whose role in the mortgage market came under sharp scrutiny this week
during a marathon hearing in the Senate. In contrast to civil cases, the burden
of proof is higher in criminal ones, where prosecutors must prove their case
beyond a reasonable doubt.

The stakes are
high for Goldman, but they are also high for the United States attorney’s
office. Prosecutors from the Eastern District of New York lost a case last year
filed against two hedge fund managers at Bear
Stearns, whose collapse presaged the turmoil on Wall Street.

Prosecutors
built much of that case around internal e-mail messages at Bear Stearns, much
the way the S.E.C. and senators have pointed to e-mail messages at Goldman in
which employees had disparaged investments that they were selling to their
customers.

In the end,
however, prosecutors were unable to
prove to a jury any criminal wrongdoing by the Bear Stearns employees.

A spokesman for
Goldman declined to say whether the bank knows about a criminal case, but he
said “given the recent focus on the firm, we’re not surprised” to
learn about a criminal inquiry. The spokesman said Goldman would cooperate with
any investigators’ requests for information.

A spokeswoman
for the Southern District also declined to comment.

The opening of
the Justice Department investigation was first reported Thursday evening by The
Wall Street Journal’s Web site.

Goldman has said
it will defend itself against the S.E.C.’s accusations. The firm’s executives
discussed the case last week during their quarterly earnings call, and this
week, they testified about their mortgage operations in a nearly 11-hour
hearing in Washington before a Senate subcommittee.

That hearing
focused broadly on Goldman’s mortgage operations, and the Senate subcommittee
released reams of new internal documents from Goldman. The Senate Permanent
Subcommittee on Investigations is looking into many other mortgage deals beyond
the one cited by the S.E.C.

The deal at the
heart of the S.E.C. case was one of 25 mortgage securities that Goldman created
in a program it called Abacus. The agency has hinted that it may expand its
inquiry to other Wall Street firms.

Those securities
were synthetic collateralized
debt obligations, which are bundles of derivatives that mimic the performance of mortgage bonds. The securities allowed people who
believed that the housing market would collapse to buy insurance against
certain mortgage bonds they thought might fail. When those mortgage bonds did
fail, the investors in the Abacus deals suffered major losses.

The Abacus deals
were, however, very profitable for the parties that were negative on the
housing market. In the Abacus 2007-AC1 deal, the hedge fund manager, John
A. Paulson, raked in about $1 billion when the bonds he helped select hit
trouble.

Mr. Paulson has
not been named in the S.E.C.’s case because he was not involved in marketing
and selling the deal.

Many in Congress
have been pressing for a criminal inquiry. This week, 62 House members sent a
letter to the Justice Department asking it to conduct an investigation into
Goldman’s actions.

© The New York Times