U.K. Launches Goldman Probe After Alleging 'Moral Bankruptcy'

Britain's financial regulator launched a full-blown investigation into Goldman Sachs International on Tuesday after U.S. authorities filed civil fraud charges against its parent bank.

The announcement from the Financial Services Authority follows pressure for the probe from Prime Minister Gordon Brown, who expressed shock over the weekend at Goldman's "moral bankruptcy."

The British regulator said it would work closely with the U.S. Securities and Exchange Commission, which alleges that the bank sold risky mortgage-based investments without telling buyers that the securities were crafted in part by a billionaire hedge fund manager who was betting on them to fail.

The London-headquartered Goldman Sachs International, a principal subsidiary of Goldman Sachs Group Inc., said that "the SEC's charges are completely unfounded in law and fact." It said it looks "forward to cooperating with the FSA."

British interest in the case is likely to focus on the Royal Bank of Scotland, which paid $841 million to Goldman Sachs in 2007 to unwind its position in a fund acquired in the takeover of Dutch Bank ABN Amro, according to the complaint filed in the United States.

The possibility that RBS might be able to recoup some money from Goldman Sachs helped boost the government-controlled bank's shares, which were up 2.8 percent at midday.

The government holds an 84 percent stake in the bank, which nearly collapsed in large part because of its leadership of the consortium which took over the Dutch bank.

Fabrice Tourre, the Goldman Sachs executive named in the SEC lawsuit filed on Friday was moved to the bank's London office at the end of 2008.

Analysts warn that damage from the case could hit other big banks as well, as the Goldman lawsuit puts the spotlight on the sector's activities in the wake of the financial crisis.

Brown's anger was fueled by reports over the weekend that Goldman Sachs still intended to pay out 3.5 billion pounds ($5.4 billion) in bonuses.

The British leader, who is facing a tough general election on May 6, said that the activities of banks "are still an issue."

"They are a risk to the economy," he said. "We have got to make sure they behave in a proper way."

The opposition Conservative and Liberal Democrat parties, meanwhile, called on Brown to suspend Goldman from government work until the investigations are completed.