Goldman Sachs Group Inc said the bond trader at the center of a landmark civil fraud case against the firm is taking time off, and the regulatory fallout on Wall Street threatened to widen.
The US Securities and Exchange Commission (SEC) accused the biggest and most influential US securities firm of hiding from investors the fact that a prominent hedge fund manager was betting against a sub-prime mortgage product that he helped create.
Despite fears that the fraud suit would cast a shadow over its earnings, Goldman Sachs Group Inc said first-quarter earnings nearly doubled.
Goldman said net income rose to US$3.29 billion, or US$5.59 per share, from US$1.66 billion, or US$3.39 per share, a year earlier. Analysts on average had forecast US$4.01 per share, Thompson Reuters said.
Fabrice Tourre, the French, self-described “fabulous Fab” who is the only Goldman staffer named in the US SEC civil lawsuit, remains a Goldman employee, a spokeswoman for the bank said.
The 31-year-old has made a “personal decision to take a bit of time off,” she said.
The SEC has said investors were kept in the dark about Paulson shorting the synthetic collateralized debt obligation (CDO) he helped Goldman assemble.
One of those investors, German bank IKB, said it was reviewing its financial transactions in the run-up to the crisis. The bank said it might consider taking legal steps, but had no grounds for action so far.
The Dusseldorf-based bank nearly collapsed in 2007 and lost almost all of the US$150 million it put into the Goldman CDO.
Deutsche Bank and UBS led a 2 percent slide by European bank shares on Monday as investors feared regulators would probe deeper into past deals throughout the industry.
Britain’s Financial Services Authority (FSA) said it had started a formal investigation into Goldman Sachs International in relation to the SEC allegations. The FSA said it would work closely with its US counterpart. Germany has also said it could pursue the company.
“All this suggests you should not buy into a sector where the regulators are about to move the goal posts,” said Bruce Packard, an analyst at Seymour Pierce in London. “Even if they don’t, the pitch surface is so uneven that if the goal posts aren’t moved, unfortunately we might see a few more broken legs in future.”
The prospect of a wider probe has unsettled investors.
Citigroup chief financial officer John Gerspach said during his bank’s earnings call that the bank was being probed by the SEC as part of an industry-wide investigation into sub-prime and other issues.
He said the bank had no involvement with the Goldman case.
Meanwhile, insurance giant AIG might pursue Goldman Sachs on losses from US$6 billion of insurance deals similar to those that prompted recent SEC fraud charges, the Financial Times reported yesterday.
The US government-backed insurer, saved from collapse in 2008, lost US$2 billion in the deals on mortgage-backed securities, the financial daily said, citing sources close to the situation.
AIG’s actions might prompt others to redress their losses on the complex bundles, the Financial Times reported.
If the insurance firm established that their transactions had had disclosure issues like those in the SEC allegations, they could file a lawsuit, complain to the SEC, or both, the daily said.
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