Goldman Sachs now under formal investigation by City watchdog

A profits and bonus announcement by Goldman Sachs due later today was overshadowed this morning by an announcement from the City's top regulator that it is beginning a formal investigation into the Wall Street's firm London operations. The decision by the Financial Services Authority follows a preliminary investigation – which lasted barely 24 hours – after the Securities and Exchange Commission charged the firm and one of its London-based executives with a $1bn (£650m) fraud . The FSA was only told by Goldman that the London-based employee Fabrice Tourre was being investigated by the SEC last Friday – even though the firm had known for months that his role in the controversial Abacus transaction was being scrutinised by the US authorities. The FSA said: "Following preliminary investigations the Financial Services Authority (FSA) has decided to commence a formal enforcement investigation into Goldman Sachs International in relation to recent SEC allegations. The FSA will be liaising closely with the SEC in this review." The regulator refused to add any more information, arguing that formally referring the case to its enforcement division restricted its ability to provide more details. Tourre has been told by Goldman that he can take indefinite leave, although the firm is adamant that the 31-year-old has done nothing wrong. The French man, who is still authorised to work and operates under the individual reference number FPT01004 granted to him by the FSA , was based in New York at the time the Abacus transaction was brokered by Goldman to help hedge fund manager John Paulson place a big bet in 2007 that the subprime mortgage market would collapse. Goldman is denying that it has done anything wrong and the parties involved the transaction – financial firm ACA and German bank IKB – knew what they were doing because they were professional investors. Today the bank said in a statement: "We believe the SEC's charges are completely unfounded in law and fact and look forward to cooperating with the FSA." Royal Bank of Scotland, 84% owned by the taxpayer, lost $800m because its ABN Amro arm had insured the complex financial arrangement – known as a collateralised debt obligation (CDO) – through a credit default swap . The FSA authorises most of the people who work in the City and Tourre is permitted to work with clients. The regulator would be able to recall his authorisation if Tourre were found to have committed fraud by the SEC. Goldman is understood not to have known the SEC was bringing formal charges against the firm until last Friday when it was announced by the regulator, although it had been issued with a so-called Wells notice, informing it of the investigation, in July. The bank has conducted its own investigation into the affair and concluded that Tourre had not done anything wrong. The firm's co-general counsel Greg Palm will accompany Goldman's chief financial officer David Viniar during the profits annoucement later today to field the questions relating to the SEC investigation. Goldman is expected to post first-quarter revenues of more than $10bn and set aside up to $5bn in bonuses .