FSA investigates Goldman Sachs over fraud claims

The Financial Services Authority has begun a preliminary investigation into Goldman Sachs over allegations of fraud filed by the US Securities and Exchange Commission last week. A spokesman for the City regulator said today: “As you would expect the FSA is investigating the circumstances of this case and whether there are implications for the UK regulated entities of Goldman Sachs. If there

are, we will take appropriate action.” 

It is understood the FSA’s investigation is a preliminary fact-finding mission rather than formal referral to the financial regulator’s enforcement division. The regulator is expected to assess what, if any, possible offences were carried out in the UK divisions of the bank. It is co-operating closely with the SEC. 

At the weekend, Gordon Brown asked the UK’s financial regulator to begin an investigation after the SEC filed a $1 billion lawsuit against the bank and one of its vice presidents, Fabrice Tourre, 31.

Royal Bank of Scotland, which is 84 per cent-owned by the UK taxpayer, appears to have been one of the biggest losers from the alleged fraud. 

The Prime Minister also accused the Wall Street bank of “moral bankruptcy” over plans to award up to £3.5 billion in bonuses to its staff for three months’ work. The bank is due to announce its results for the first quarter tomorrow. 

Goldman Sachs today attempted to reassure clients it is innocent of fraud allegations filed on Friday that claim it mis-sold complex financial instruments. 

It insisted it would never condone one of its employees misleading investors or clients. The bank said in a letter to investors: “We do take our responsibilities as a financial intermediary very seriously and believe that integrity is at the heart of everything we do”. 

“Were there ever to emerge credible evidence that such behaviour occurred here, we would be the first to condemn it and take all appropriate actions.” 

Markets in Britain, Europe and Asia fell this morning as investor took fright at the potential impact of the lawsuit against Goldman Sachs, as well as the widespread disruption across Europe caused by the ash cloud from Iceland’s volcanic eruption. 

Goldman Sachs said: “This particular transaction has been the subject of SEC examination and review for over eighteen months. Based on all that we have learned, we believe that the firm’s actions were entirely appropriate, and will take all steps necessary to defend the firm and its reputation by making the true facts known.” 

Goldman Sachs repeated today it had lost $90 million on the financial instruments — known as collateralised debt obligations (CDOs) — which it allegedly used to “bet against” clients.

Lawyers yesterday predicted that the lawsuit would open the gates to a flood of litigation. 

Richard Blumenthal, the Connecticut attorney-general, said that he had begun a review of the case. “A key question is whether this is an isolated incident or part of a pattern of investment banks colluding with hedge funds to purposely tank securities they created and sold to unwitting investors.”