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A security guard tries to stop a photographer taking pictures of the offices of Goldman Sachs in London, on April 19, 2010. The British Financial Services Authority said Monday it was looking into US fraud charges against Goldman Sachs after Prime Minister Gordon Brown, accusing the bank of "moral brankruptcy", urged a British probe.

LEON NEAL/Leon Neal /AFP/Getty Images

The battle lines in the most high-profile case to hit Wall Street in the wake of the financial crisis are growing starker by the day.

Goldman Sachs Group Inc. continues to fire back at charges accusing it of fraud. In a foretaste of its legal strategy, Goldman is arguing that the investors involved in the transaction were experienced and sophisticated players who had "all the information they needed" to evaluate the deal at the heart of the case, contrary to the allegations of U.S. regulators.

Goldman's salvos are just the first moves in what will be a lengthy combat with the U.S. Securities and Exchange Commission.

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The SEC filed civil charges against Goldman and one of its employees last Friday over a $1-billion (U.S.) deal that involved complex derivatives tied to the fortunes of poor-quality mortgages. Fabrice Tourre, the Goldman trader accused of fraud, is taking time off from the company, a spokesperson said.

The U.S. stock market regulator alleges that Goldman failed to tell investors that Paulson & Co., a hedge fund looking to profit from a collapse of the housing market, was the driving force behind the transaction and played a key role in selecting the mortgages involved.

That meant investors were unaware that the deal was being rigged to fail, the SEC said. (Paulson was not charged in the case, the SEC said, because it was Goldman that described and sold the instrument to investors.)

Neither the SEC nor Goldman is likely to back down. "You don't stir up the hornets nest and then say, let's sit down and chat," says Peter Henning, a professor at Wayne State University Law School in Detroit and a former SEC enforcement lawyer. "Now it's a fight."

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Goldman will be under the microscope again Monday when it releases its earnings report for the first quarter of 2009, which analysts believe was a highly profitable one for the firm. David Viniar, Goldman's chief financial officer, is expected to address questions on an early morning conference call, together with one of the firm's top in-house lawyers.

A fuller picture of the manoeuvring that preceded Friday's bombshell announcement is starting to emerge. Last July, the SEC warned Goldman that it intended to file charges. In September, the firm and its lawyers responded with a 40-page document rebutting the SEC's charges. In it, Goldman said it was confident that a fuller exploration of the facts "will underscore that no one in fact considered Paulson's role important and that no one was misled." Goldman inquired about the case last month, but said it heard nothing from the SEC until last Friday's charges, The Wall Street Journal reported.

Both sides are girding themselves for an extended legal battle. Typically it's rare for SEC cases to go to trial, because the parties involved want to avoid the uncertainty associated with a jury, particularly when it comes to matters of financial arcana.

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Mr. Henning, the former SEC lawyer, said he could not recall an instance in the past 30 years where the SEC brought charges against a major financial institution and it ended up being tried in court. That included the SEC cases against Drexel Burnham Lambert for insider trading, among other things, in the late 1980s; and against Salomon Brothers, for manipulating the Treasury bond market in the early 1990s.

For now, there's no appetite for compromise, experts said. "The SEC is trying to make a mark with this case and Goldman has its reputation at stake," said Michael Perino, an expert in securities law at St. John's University School of Law in New York. "At this early stage of the game, settlement seems an exceedingly remote possibility."

Experts said they expect Goldman's first move will be to file a motion to dismiss the case, which a judge would rule on in a few months. It could be a year or even two before the matter approaches a possible trial.

The SEC will aim to convince the judge - and potentially a jury - that Goldman omitted key information when it sold the deal, dubbed "Abacus 2007-AC1," to investors.

On the basis of its recent statements and its September response to the SEC, Goldman will likely counter that investors knew plenty about Abacus. Even if they had known that Paulson & Co. was involved, the firm suggested it would not have made much difference to the investors.

Paulson was not charged in the case, the SEC said, because it was Goldman that described and sold Abacus to investors.

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