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Goldman Says It Didn't Mislead Investors

Goldman Sachs Group Inc., facing a fraud lawsuit from U.S. regulators, reported that net income almost doubled in the first quarter and said it didn’t mislead investors.

“This all seems to be at root about whether someone intentionally misled someone, and that’s not something we would approve of or sanction,” Goldman Sachs Co-General Counsel Greg Palm told analysts on a conference call today. He spoke after the firm said earnings jumped 91 percent to $3.46 billion, or $5.59 a share, surpassing analysts’ estimates.

Goldman Sachs, led by Chief Executive Officer Lloyd Blankfein, is fending off regulatory claims while cementing its position as the most profitable investment bank in Wall Street history. The Securities and Exchange Commission accused the firm of failing to tell investors in a 2007 collateralized debt obligation that hedge fund Paulson & Co., which planned to bet against the CDO, helped select the underlying assets.

Goldman Sachs had “no incentive” for the deal to fail, and lost more than $100 million on the transaction, Palm said. The firm was “somewhat surprised” when the SEC filed its suit on April 16, as “no one had told us in advance,” he said.

Blankfein, 55, didn’t refer specifically to the suit today, saying in a statement announcing earnings that “in light of recent events involving the firm, we appreciate the support of our clients and shareholders, and the dedication and commitment of our people.”

Photographer: JB Reed/Bloomberg

Goldman Sachs Group Inc.'s new headquarters building stands at 200 West Street in New York, on April 19, 2010. Close

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Photographer: JB Reed/Bloomberg

Goldman Sachs Group Inc.'s new headquarters building stands at 200 West Street in New York, on April 19, 2010.

Possible Fallout

Shareholders said concern about potential fallout from the accusations would supersede the earnings report. The stock, which dropped 13 percent on April 16 after the SEC filed its case, fell $3.34, or 2.1 percent, to $159.98 at 4 p.m. in New York Stock Exchange composite trading.

Ralph Cole, a senior vice president in research at Ferguson Wellman Inc., is among investors who said they are concerned the case could hurt Goldman Sachs’s reputation and cause clients to switch their business to other firms. Another worry is that the case could lead to additional lawsuits against the bank and add impetus to financial-reform efforts that would erode Goldman Sachs’s earnings potential.

“The question has been raised and cannot be definitively answered as to whether the company’s political/SEC issues are damaging its customer base on the investment banking and asset management sides,” Richard Bove, an analyst at Rochdale Securities in Lutz, Florida, wrote in a note to investors. “They require goodwill. The company does not understand that it needs a strong offense to gain that goodwill.”

Talking to Customers

David Viniar, Goldman Sachs’s chief financial officer, told reporters on a conference call today that the company has “spent an enormous amount of time” talking to clients.

“We found that largely our clients are supportive of us and the most important thing is to perform,” Viniar said.

In the U.K., Britain’s financial regulator said Goldman Sachs’s London units will be formally investigated for fraud. “The Financial Services Authority has decided to commence a formal enforcement investigation into Goldman Sachs International in relation to recent SEC allegations,” the FSA said in an e-mailed statement.

In its earnings announcement, Goldman Sachs said revenue from fixed-income, currencies and commodities trading, which contributed more than half of revenue last year, rose 13 percent in the first quarter to an all-time high of $7.39 billion. That beat estimates for $5.95 billion from Howard Chen at Credit Suisse Group AG and $6.09 billion from Roger Freeman at Barclays Capital.

Bank of America

Bank of America Corp. and JPMorgan Chase & Co., the two biggest U.S. banks by assets, both reported record fixed-income revenue last week of $5.52 billion and $5.46 billion respectively.

“We’re looking at a great year for capital markets firms,” Thomas Brown, CEO of Second Curve Capital LLC and founder of bankstocks.com, said yesterday.

Equities-trading revenue rose 18 percent to $2.35 billion from $2 billion a year earlier, Goldman Sachs said. Gains from principal investments, which includes the company’s stakes in Industrial & Commercial Bank of China Ltd. as well as real estate and other companies, were $510 million compared with a net loss of $1.41 billion in the first quarter of 2009.

Investment-banking revenue climbed 44 percent to $1.18 billion from $823 million last year. Within that, fees from financial advice fell 12 percent to $464 million from $527 million and equity-underwriting revenue surged to $371 million from $48 million. Debt underwriting generated $349 million compared with $248 million a year earlier.

Compensation and benefits, the firm’s biggest expense, increased 17 percent to $5.49 billion in the quarter, or 43 percent of overall revenue. The cost compared with $4.71 billion in the first quarter of 2009, when the firm set aside 50 percent of revenue.

The bank said the percentage of quarterly revenue put aside for compensation expense was the lowest for any first quarter.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net

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