NEW YORK, FEB. 10 -- Federal prosecutors are investigating the relationship between Goldman, Sachs & Co. and a New Jersey investment firm that was raided by federal agents late last year, according to sources familiar with the probe.

In particular, the sources said, the government is probing the relationship between the New Jersey firm, Princeton Newport Partners, and Goldman executive Robert Freeman, who was arrested, along with two other Wall Street executives, one year ago this week on insider stock trading charges.

The insider trading and related charges were withdrawn by the Manhattan U.S. attorney last spring, but Freeman and the two other executives, Richard Wigton and Timothy Tabor, remain under investigation. Wigton is employed by Kidder, Peabody & Co., while Tabor was formerly employed by Kidder. All three have asserted their innocence.

Princeton Newport, a major participant in aggressive, mathematically based stock and bond trading strategies, was searched last December by about 50 federal agents -- including Internal Revenue Service agents and U.S. postal inspectors -- seeking evidence of an alleged tax and securities fraud scheme.

Named in search warrants filed in connection with the raid were four Princeton Newport partners and employees of the Wall Street firms Drexel Burnham Lambert Inc. and Merrill Lynch & Co. Inc. Goldman was not named in the warrants.

The search warrants stated that the federal agents were seeking evidence about "parking" of securities and a "scheme to generate false and inflated federal income tax deductions." Sources described the raid as a new turn in the widespread government investigation of Drexel, some of its key employees and others. In a parking scheme, an investor may seek to hide his ownership of securities in return for a financial benefit.

Prosecutors are apparently attempting to use their unannounced raid on Princeton Newport to increase pressure on both Drexel and Goldman, whose employees are targets of separate securities fraud investigations. Sources said that prosecutors are trying to encourage Princeton Newport employees to provide evidence against employees of Drexel and Goldman, including Freeman.

Drexel has said repeatedly that it knows of no wrongdoing by the firm or any of its employees. A spokesman reiterated that assertion today. Goldman declined comment; Merrill said it was not a subject of the investigation. Manhattan U.S. Attorney Rudolph W. Giuliani did not return phone calls.

Princeton Newport and its four partners named in the search warrants denied any wrongdoing. Ted Wells, an attorney for one of the partners, said today that the firm "remains proud of its longstanding relationship with Goldman Sachs and Bob Freeman."

Princeton Newport was a major client of Goldman, sources said, as well as of Drexel, Merrill Lynch, and other Wall Street firms. While Goldman did not execute the tax-related trades by Princeton Newport which are being probed by investigators, it helped process Princeton Newport's trades, the sources said.