Britain launched a probe into US bank Goldman Sachs on Tuesday linked to US fraud charges that the Wall Street giant misled investors, but the bank denied any fault while promising to cooperate.
As the bank revealed surging first-quarter profits in New York, London's Financial Services Authority (FSA) watchdog said it would probe fraud charges announced last week by the US Securities and Exchange Commission (SEC).
The two investigations concern complex instruments and trading positions related to the high-risk end of the US mortgage market which triggered the global financial crisis.
"Following preliminary investigations, the FSA has decided to commence a formal enforcement investigation into Goldman Sachs International in relation to recent SEC allegations," Britain's financial regulator said.
"The FSA will be liaising closely with the SEC in this review," it added in a brief statement.
Goldman, which employs about 5,500 staff in London, undertook to cooperate with the British probe following US fraud charges which it has again dismissed as "unfounded".
The bank said in a statement emailed to AFP: "We believe the SEC's charges are completely unfounded in law and fact, and look forward to cooperating with the FSA."
Last week the US Securities and Exchange Commission (SEC) filed a civil suit against Goldman, alleging it allowed a leading hedge fund to put together a product for investors, which the fund was at the same time betting against.
Hours after the FSA announcement, the embattled US investment firm posted soaring first-quarter profits of 3.46 billion dollars (2.56 billion euros).
The company has vigorously denied any fraud as it seeks to defend its reputation as Wall Street's most stable finance house.
But Tuesday's results threaten to be overshadowed by the probes in London and New York.
"The FSA involvement suggests that this story has legs, and while it will be a long time before there is any resolution, it will certainly give US legislators a pile of regulatory ammunition," said GFT analyst David Morrison.
He also warned: "If the net widens to cover other financial institutions and other investment products, then the implications may not yet be priced into equity markets."
The British probe also comes just days after Prime Minister Gordon Brown blasted Goldman Sachs over what he called its "moral bankruptcy".
Brown, whose Labour Party is battling to hold onto power at a general election due on May 6, had Sunday said the US charge against Goldman underlined the need for more reform of the international banking system.
The Sunday Times newspaper reported over the weekend that Goldman was planning to pay staff a bonus pool worth 3.5 billion pounds (4.0 billion euros, 5.3 billion dollars) for work achieved in the first quarter of this year.
"I am shocked at this moral bankruptcy. This is probably one of the worst cases that we have seen," Brown told BBC television on Sunday.
Regarding the alleged happenings at Goldman Sachs, he added: "Hundreds of millions of pounds have been traded here and it looks as if people were misled about what happened."
The SEC has accused Goldman Sachs of "defrauding investors by misstating and omitting key facts" about a product which was based on subprime mortgage-backed securities.
The SEC said that Goldman had failed to tell investors that a major hedge fund had helped put together the controversial financial product known as collateralized debt obligation (CDO) and was at the same time taking trading positions against it.
Paulson & Co, one of the world's biggest hedge funds, paid Goldman Sachs to structure a transaction in which it could take speculative positions against mortgage securities chosen by the fund, according to the commission.
The SEC alleged that investors -- including the Royal Bank of Scotland -- had lost about one billion dollars as a result of the alleged fraud.
RBS was subsequently bailed out by the British taxpayer at the height of the global financial crisis, and is now 84-percent owned by the state.