The US Department of Justice is investigating allegations that the prestigious American investment bank and some 24 other Wall Street houses conspired to fix underwriting fees on initial public offerings of a wide-range of companies.
Referring to a federal demand for information received by Goldman and other banks, a Goldman spokesman said: "We do not expect this to have any effect on our plans to go public. This request for information by the DOJ is a follow-on to pre-existing legislation."
Before news broke of the inquiry - evoking memories of the US government crackdown on Michael Milken, Ivan Boesky, and other insider traders in the 1980s - the sale of 15 per cent of Goldman for $3.8bn (pounds 2.3bn) was believed to be 10 times oversubscribed.
Analysts said this heavy demand all but ensured the success of the share sale at the top end of the $45-$55 price range proposed in its prospectus.
The final pricing of Goldman shares tomorrow, due after the New York Stock Exchange closes, is thus likely to value Goldman at about $25bn, putting it on a par with the two most successful publicly held Wall Street firms, Morgan Stanley Dean Witter and Merrill Lynch.
Nevertheless, Wall Street reacted to the news of the DOJ investigation with a mixture of shock and a wish to downplay its significance, and brokerage stocks fell.
Lehman Brothers, Morgan Stanley, Donaldson, Lufkin & Jenrette, and Citigroup's Salomon Brothers Smith Barney unit also confirmed they had received subpoenas.
The Justice Department inquiry focuses on one of Wall Street's most profitable lines of business. Securities firms collected more than $2bn last year from initial public offering (IPO) underwriting fees, according to Securities Data.
Government investigators are questioning how those fees are set, after separate, private anti-trust lawsuits alleged underwriters in most cases stuck consistently to a 7 per cent fee.
"This news intrigues me greatly," said Andrew Smithers of London-based fund management advisers Smithers & Co. "Underwriting fees in New York are higher than underwriting fees in the City. I've often wondered why the forces of competition could not narrow the difference."
Wall Street houses claimed the investigation was old news. "There was an article in the National Post, a Canadian paper," said a banker at one.
But the DOJ subpoenas that reached Goldman and other Wall Street firms Thursday were new. They compelled Goldman to amend the filing for its IPO, which is how the news broke in the US media.
Word of the DOJ investigation triggered gallows humour on Wall Street. "Those Goldman guys just can't win. First time round they get hit by Russia," a rival banker said, referring to the postponement of the IPO last August in last year's financial panic. "Now this."
Some bankers questioned the timing of the DOJ subpoenas - coming virtually on the eve of the Goldman share sale. But Goldman itself rejects the notion that the subpoenas were timed to coincide with the IPO.
The roots of the investigation go back to beginning of Wall Street's technology-led IPO boom. Success stories like the flotation of internet bookseller Amazon.com make headlines. For every soaraway success, however, there are numerous flops. Angry investors sometimes sue, naming both the company and its underwriters.
In 1995, for example, Goldman floated MediaMobile, a New Jersey-based pager service. Goldman underwrote $53m shares in the US, and $17m shares internationally through Goldman Sachs International. MediaMobile did not prosper. It is now in bankruptcy. In December 1996, investors filed a class action complaint against it and Goldman seeking compensation.
These class action complaints have been pooled by US district courts, particularly the US District Court for the Southern District of New York. Five months ago, the US government stepped in to examine the allegations contained in such complaints.
The investigation remains in a preliminary phase. But news of it is likely to feed a growing feeling in the US that Wall Street is profiting disproportionately from globalisation. It may also spur European merchant banks to step up attempts to break into the US underwriting market.