Goldman Earnings Up 91 Percent as Fraud Case Looms

Goldman Sachs said today its first-quarter earnings almost doubled to $3.3 billion as its trading business again surpassed the rest of the financial industry. A top lawyer for the bank, which is facing civil fraud charges, said Goldman would "never intentionally mislead anyone."

Goldman Sachs Group Inc. earned $5.59 a share on revenue of $12.78 billion as bond, commodities and currency trading buoyed its profits for yet another quarter. That was well above expectations of analysts surveyed by Thomson Reuters. It was Goldman's second most profitable quarter since going public in 1999. In the fourth quarter, Goldman Sachs earned a record $4.79 billion.

Goldman Sachs also reported sharply higher fees from underwriting stock and debt offerings.

The bank's earnings were overshadowed by the Securities and Exchange Commission's civil fraud lawsuit filed Friday. The SEC alleges that Goldman Sachs and one of its vice presidents misled investors who bought complex financial products that were expected to fail.

Also Tuesday, Britain's financial regulator launched an investigation into Goldman Sachs International, the bank's London-based operations. The announcement from the Financial Services Authority follows pressure from Prime Minister Gordon Brown, who expressed shock over the weekend at Goldman's "moral bankruptcy" for planning to pay big employee bonuses despite the investigation.

During a conference call with analysts Tuesday, Goldman co-general counsel Greg Palm gave the company's most detailed rebuttal to date of the SEC charges. After an opening statement that mirrored the bank's previous comments, Palm took questions for nearly an hour in an exchange dominated by analyst' interest in the fraud charges.

Palm was asked why Goldman Sachs did not disclose to shareholders that it had been served with a Wells notice about the SEC's investigation of a transaction involving collateralized debt obligations, or CDOs. A Wells notice is a letter describing potential charges against a company and requesting a response.

Palm said the company does not report to shareholders every time it receives a Wells notice. "We just disclose it if we consider it to be material," he said. Palm said the company has provided the SEC with "an extensive amount of documents and testimony" over the past 18 months relating to the transaction.

The charges against Goldman Sachs took investors by surprise. The company's stock fell almost 13 percent on Friday, although it has recovered somewhat since then. Goldman's shares opened higher Tuesday but then slipped 97 cents, or 0.6 percent, to $162.35 in heavy trading.

Palm repeated the company's statement that it did not know that charges were going to be filed against it on Friday.

The SEC alleges that Goldman Sachs did not tell two clients that the CDOs they bought were crafted in part by billionaire hedge fund manager John Paulson, who was betting on them to fail.

The two clients, the German bank IKB Deutsche Industriebank AG and the financial consulting firm ACA Management LLC, "were institutions with significant resources and extensive experience in the CDO market," Palm said.

"We would never intentionally mislead anyone," Palm said.

Goldman hired ACA Management to select the pools of subprime mortgages it used to create the CDO. However, the SEC alleges that Goldman didn't tell the buyers that Paulson's hedge fund, Paulson & Co., also played a role in selecting the mortgage pools and stood to profit from their decline in value.

Palm denied that charge.

"The portfolio here was not selected by John Paulson," Palm said. "The portfolio was selected by ACA."

Palm said the bank has had no discussion with the U.S. Justice Department regarding the transaction, suggesting it so far remains a civil complaint, not criminal.

The company told analysts that it lost more than $100 million on the transaction, up from the $90 million earlier reported. The higher amount was due in part to fees and other expenses, said David Viniar, Goldman Sachs' chief financial officer.

In its earnings report, Goldman Sachs said it set aside $5.5 billion in the first three months of the year to pay employee salaries and bonuses, up 17 percent from last year. However, the bank said the percentage of revenue set aside for compensation in the quarter fell from 50 percent to 43 percent year-over-year.

Banks' high levels of compensation, including bonuses, have come under heavy criticism since the financial crisis that began in 2008. Lawmakers and the public have complained that the banks were rewarding the same employees whose risky trading practices helped plunge the country into recession. Goldman Sachs, because of its great success in trading, has come under particular sharp criticism.

Goldman's trading of risky assets once again generated the bulk of its profits. Revenue from trading of bonds, currencies and commodities rose 13 percent in the quarter to $7.39 billion.

Investment banking revenue, considered the foundation of the company's business, rose to $1.18 billion, up 44 percent from last year. Investment banking includes advising on corporate deals and raising capital for stock and bond issues.

Goldman Sachs, which has outperformed other financial companies for years, has been the strongest bank throughout the financial crisis. It had less exposure to toxic mortgage-related securities than other companies and also has been more aggressive in its trading.

Goldman Sachs also said Tuesday that the executive at the center of the civil fraud case is voluntarily taking some time off from work.

Fabrice Tourre, who was named in the SEC lawsuit against the firm, is taking a break from his position at the firm's London offices, Goldman Sachs spokesman Michael Duvally said.

"It is voluntary. He decided to take some time off," Duvally said.

Tourre was a vice president in his late 20s when the alleged fraud was orchestrated in 2007. Tourre, the SEC said, boasted to a friend that he was able to put such deals together as the mortgage market was unraveling in early 2007.

Tourre, 31, has since been promoted to executive director of Goldman Sachs International in London.