FSA to look into the UK activities of the embattled Wall Street bank which the US regulator has accused of a $1bn fraud

Embattled Wall Street firm Goldman Sachs is now facing an investigation by the City watchdog, the Financial Services Authority, following the $1bn (£650m) fraud allegations brought by the US regulators.

Goldman Sachs insisted its actions were “entirely appropriate” and that it would “vigorously contest” the charges brought by the US Securities and Exchange Commission (SEC).

Goldman stressed that it had lost $90m on the transaction, known as Abacus 2007-AC1, and tried to argue that its clients had been professional investors highly experienced in the complex financial instruments they were buying.

The statement comes ahead of the bank’s first-quarter results tomorrow, which are expected to show it has been able to earmark $5bn for staff pay and bonuses.

As Fabrice Tourre, the bank’s 31-year-old vice-president named in the case brought by the SEC stayed away from his desk in the London headquarters of the firm, calls were mounting for the City’s watchdog, the FSA, to launch its own inquiry into the affair which dates back three years.

The FSA confirmed today that it was investigating the events. “As you would expect the FSA is investigating the circumstances of this case and whether there are any implications for the UK-regulated entities of Goldman Sachs. If there are, we will take appropriate action. We are working closely with overseas regulators and will co-operate fully with the SEC investigation” the FSA said.

In a detailed statement today, Goldman stepped up its defence. It said: “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.”

The SEC’s 22-page suit charges Goldman with working with US hedge fund, Paulson & Co, to structure and sell a complex package of mortgages to clients while Paulson took a “short” position betting that the same mortgages would fail. The mortgages were packaged into a collateralised debt obligation (CDO) – the instruments at the heart of the 2007 credit crisis – and lost investors more than $1bn in just nine months. During the same period, Paulson made a similar amount in profit. The SEC asserts that Goldman did not disclose Paulson was on the other side the transaction.

Goldman believes the charges are politically motivated and come at a time when President Barack Obama is trying to force through legislative changes to clean up the US banking industry.

The firm said the two professional investors which bought the Abacus instrument – Germany’s IKB and ACA Capital Management of the US – were experienced investors. ACA has managed 26 CDOs and “independently approved” the 90 residential mortgage-backed securities used in the Abacus deal.

Royal Bank of Scotland lost up to $800m on the transaction as a result of its takeover of Dutch bank ABN Amro which had intermediated a credit default swap between Goldman and ACA to help them insure against potential losses.

The Goldman Sachs statement said: “The core of the SEC’s case is based on the view that one of our employees misled these two professional investors by failing to disclose the role of another market participant in the transaction, namely Paulson & Co, and that the employee thereby orchestrated the creation of materially defective offering materials for which the firm bears responsibility.

“Goldman Sachs would never condone one of its employees misleading anyone, certainly not investors, counterparties or clients. We 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 indeed occurred here, we would be the first to condemn it and take all appropriate actions.”.

It is expected that the SEC case against Goldman could open the floodgates for other suits after Dutch bank Rabobank accused Merrill Lynch of embarking on a similar practice when selling it a CDO.

Goldman reckoned the action it was facing would not have an effect on the wider CDO market. “The SEC complaint is related to a single transaction in 2007 and involves a highly particularised set of alleged facts. It would not appear to have broad ramifications for the CDO market generally,” the bank said.

Source:Guardian