Fraud case upstages Goldman earnings

Goldman Sachs on Tuesday failed to stem the fallout from US civil fraud charges levied against it, as bumper first-quarter results were overshadowed by investors' concerns over the case's implications for Wall Street's premier investment bank.

Goldman's woes were compounded by news that UK regulators had launched their own probe, calls by some European politicians for governments to stop working with the bank, and the emergence of fresh details on the security at the centre of the case.

Despite announcing better-than-expected first-quarter earnings of $3.5bn, Goldman saw its shares fall more than 2 per cent.

On Friday, the Securities and Exchange Commission accused Goldman and one of its vice-presidents of hiding from investors that the hedge fund Paulson & Co had influenced the composition of a mortgage- backed security it wanted to bet against.

Goldman executives on Tuesday forcefully denied the allegations and said for the first time that Fabrice Tourre, the employee who was charged by the SEC, had told one investor that Paulson was "short", betting that the security would fail.

The SEC has accused Goldman of misleading investors by saying the fund wanted to buy into the deal.

"We would never intentionally mislead anyone, certainly not our clients or a counterparty," Greg Palm, Goldman's general counsel, said.

"Our employee believes he indicated Paulson was on the short side."

Mr Palm said the sharp losses incurred by the collateralised debt obligation, a mortgage-backed security, were due to the collapse of the US housing market, rather than the product's composition.

However, a table included by Goldman in its September response to the SEC shows that the CDO incurred writedowns in less than a month compared with an average of 1.7 months for similar deals.

Goldman insiders say this was due to the timing of the CDO, just before the end of the US housing bubble in April 2007. But the data could boost the SEC case.

Goldman on Tuesday left the door open to a settlement, a common occurrence in US regulatory cases, but surprised analysts when it said it had lost more than $100m on the CDO, three days after stating its net loss was $75m. David Viniar, the finance chief, said Goldman had found other losses.

The UK's Financial Services Authority on Tuesday launched a formal probe into Goldman's London unit.

source: cnn.com