“This is one of those stocks that everyone thought was bulletproof,” said Harry Milling, a mutual fund analyst who specializes in financial services at Morningstar Inc.

The suit against Goldman Sachs alleges that the bank sold collateralized debt obligations without telling buyers that a hedge fund had helped select the subprime mortgages included in them. The SEC also claims that the bulge bracket firm failed to inform investors that the hedge fund, Paulson & Co. Inc., was placing bets that the CDOs would decline in value.

Despite announcing better-than-expected first-quarter earnings of $3.3 billion last Tuesday, Goldman Sachs has seen its stock value fall 14.6% since the SEC lawsuit was announced. The stock closed at 184.3 on April 15 — 75 cents below its highest close of the year April 14 — and fell to 157.4 at the close April 23.

Among the funds most heavily invested in Goldman Sachs stock are The Hartford Financial Services Group Inc.'s Hartford Capital Appreciation and Hartford Capital Appreciation HLS funds, MFS Investment Management's MFS Value Fund and Fidelity Investments' Disciplined Equity and Equity Income funds.

Julia Zweig, a spokeswoman for The Hartford, and Dan Flaherty, a spokesman for MFS, confirmed the data provided by Lipper but declined to elaborate. Sophie Launay, a Fidelity spokeswoman, declined to comment.

Goldman Sachs stock was the top holding of Wells Fargo's Advantage Large Company Growth Fund, which had 8% of assets in the Wall Street firm as of the end of last month. Wells Fargo's Advantage Specialized Financial Services Fund had 6.6% of its assets invested in Goldman Sachs, making the stock one of the fund's top holdings.

“The portfolio management team of each fund is clearly aware of the issues impacting these securities and will make any decisions with respect to such securities based upon their individual investment disciplines and the particular investment policies of the fund they manage,” said Peter Greenley, a spokesman for Wells Fargo Funds.

Some portfolio managers and financial advisers sold their holdings in Goldman Sachs months ago for fear of how financial regulation and increasing investigation into the subprime-mortgage meltdown might affect the firm.

“Everyone on the Street has been recommending Goldman, but I didn't own it, because of the financial reform,” said the manager of a large-cap-growth fund, who asked not to be identified.

Jim Flinchum, a managing principal at Bay Capital Advisors, which has $40 million in assets under management, got all his clients out of Goldman Sachs stock last month and is reviewing their mutual fund holdings to see if any funds have significant holdings in the firm.

“I didn't like what was happening with the financial reform,” Mr. Flinchum said. “My gut feeling is that this lawsuit isn't the end of this.”

But not everyone with holdings in Goldman Sachs is selling. In fact, a number of managers are buying the stock, believing that it is undervalued.

Mark Mulholland, portfolio manager of the Matthew 25 Fund, which has 6.8% of its assets invested in the company, is holding on to the stock. Goldman Sachs is the fund's third-largest holding.

“I believe I will make money on it,” said Mr. Mulholland, who is also president of Matthew 25. “I believe they will work through this turmoil.”

Similarly, Harry Rady, portfolio manager and chief executive of Rady Asset Management LLC, has been buying the stock since it dropped more than $20 on April 16.

“Even if they have to pay $3 billion over this suit, it's a drop in the bucket,” he said. “Goldman is a world-class franchise, and this is a short-term transitory event.”

Many industry observers wonder whether Ken Heebner, portfolio manager of the CGM Focus Fund, is holding on to the stock .

Natixis CGM Advisor Targeted Equity Fund Ticker, which is a clone of the CGM Focus Fund, had 8.3% of its assets invested in Goldman Sachs stock as of Feb 28, according to Morningstar. The CGM Focus Fund had 8.2% of its assets invested in the company at the end of last year, based on Morningstar's latest data.

“It's not surprising that he would have a big stake in Goldman, because he tends to make big bets and then trades very quickly,” said David Kathman, a mutual fund analyst at Morningstar. “It's definitely risky to take bets on a single company.”

Martha Maguire, a spokeswoman for CGM, declined to comment.

Although the Goldman Sachs case may shape the passage of financial services reform legislation, managers and analysts think that the financial services sector is still a good place for investors to be.

The sector was the top-performing fund group in the last quarter, returning 11.5%, according to Lipper, which also noted that it was the worst-performing sector over the past three years, returning -15.2% annualized.

“Whether the financial services sector is a good investment depends on an investor's time horizon,” said Jeff Tjornehoj, a senior research analyst at Lipper. “For six months, it could be volatile, but for six years, it could be good.”

E-mail Jessica Marquez at jmarquez@investmentnews.com.