Wednesday, April 21, 2010

UK regulator to investigate Goldman Sachs

S Kalyana Ramanathan / London April 21, 2010

The market watchdog in UK, Financial Services Authority (FSA), today said it would investigate the London units of Goldman Sachs Group Inc.

This followed a decision by the Securities and Exchange Commission (SEC) of the US to sue the financial major for fraud.

“Following preliminary investigations, FSA has decided to commence a formal enforcement investigation into Goldman Sachs International in relation to recent SEC allegations. FSA will be liaising closely with SEC in this review,” FSA said in a statement today. No further details were provided.

The New-York based Goldman Sachs is in the dock after SEC filed a suit against it and an employee for defrauding investors of $1 billion through a subprime-related financial product. According to SEC, in early 2007, Goldman Sachs created and sold a CDO (collateralised debt obligations)-linked to subprime mortgages, without disclosing that hedge fund Paulson & Co helped pick the underlying securities and bet against the vehicle, known as Abacus 2007-AC1.

FSA’s decision to investigate follows a preliminary investigation, which lasted less than 24 hours.

In an interview to BBC over the weekend, UK Prime Minister Gordon Brown had promised a probe by FSA into Goldman Sachs’ UK operations, saying this was “one of the worst cases of moral bankruptcy” he had seen.

The UK connection to the scandal that is primarily centred in the US comes in the form of the bank's UK-based executive, Fabrice Tourre, who is said to have been stationed in the US when this alleged fraud was committed. While Goldman Sachs has asked Tourre to take indefinite leave, it has also said its 31-year old executive had not committed any fraud.

He is also expected to receive a sizeable bonus this year. Another significant reason for UK's watchdog to investigate the banker is because of the significant loss suffered by Royal Bank of Scotland, which is now 84 per cent owned by British tax payers. RBS, is said to have lost $800 million because its ABN Amro arm had insured the complex deal through a credit default swap.

Following SEC's fraud charges, Goldman Sachs group said they are completely unfounded in law and fact and it will vigorously contest them and defend the firm and its reputation. The company also said it had itself lost more than $90 million on the transaction, while its fee was $15 million.

Today's decision by FSA to investigate Goldman Sachs comes when the group announced an impressive first quarter results.The Goldman Sachs Group today reported net revenues of $12.78 billion and net earnings of $3.46 billion for its first quarter ended March 31, 2010. The first quarter earnings nearly doubled, which was significantly contributed by fixed income trading profits. Fixed Income, Currency and Commodities generated quarterly net revenues of $7.39 billion for the firm.

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