I'm pretty sure that is a 3 wire sensor and gets its ground though the exhaust system. Where it bolts to the manifolds should be sufficient ground assuming the engine ground is ok.

An easy test to see if the ECU is responding to the O2 input is to touch the sensor lead (disconnected) with one hand and the battery positive with the other and see if the lambda changes with it. You'll transmit just a few millivolts through your hands and simulate O2 voltage. If the lambda doesn't respond (operating temp)you could have a bad ECU, if it does respond look towards the sensor.

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90 300TE 4-M
Turbo 103, T3/T04E 50 trim
T04B cover .60 AR
Stage 3 turbine .63 AR
A2W I/C, 40 LB/HR
MS2E, 60-2 Direct Coil Control
3" Exh, AEM W/B O2
Underdrive Alt. and P/S Pulleys,
Vented Rear Discs, .034 Booster.
3.07 diffs 1st Gear Start

90 300CE 104.980
Milled & ported head, 10.3:1 compression
197° intake cam w/20° advancer
Tuned CIS ECU
4° ignition advance
PCS TCM2000, built 722.6
600W networked suction fan
Sportline sway bars
V8 rear subframe, Quaife ATB 3.06 diff