Goldman Sachs Unit Settles With SEC, NYSE

by Glen Shapiro, LawAndTax-News.com, New York

16 March 2007

The US Securities and Exchange Commission and NYSE Regulation, Inc. on Wednesday announced separate settled enforcement proceedings against a prime broker and clearing affiliate of The Goldman Sachs Group, Inc. for violations arising from an illegal trading scheme carried out by customers through their accounts at the firm.

Both proceedings found that firm customers traded and profited by illegally selling securities short just prior to public offerings of companies' securities. In connection with the illegal short sales, the SEC and the NYSE found that the affiliate, Goldman Sachs Execution and Clearing L.P., violated the regulations requiring brokers to accurately mark sales long or short and restricting stock loans on long sales.

The SEC and the NYSE further found that, if Goldman had instituted and maintained appropriate procedures, it could have discovered through its own records the customers' illegal activity.

The SEC Order and the NYSE's Decision alleged that Goldman's customers carried out the illegal short-selling scheme by placing their orders to sell through the firm's REDI System - Goldman's direct market access, automated trading system - and falsely marking the orders "long."

Relying solely on the way its customers marked their orders, Goldman executed the transactions as long sales. In addition, because the customers had sold the securities short and did not have the securities at settlement date, Goldman delivered borrowed and proprietary securities to the brokers for the purchasers to settle the customers' purported "long" sales.

Both the SEC Order and the NYSE Decision found that Goldman's exclusive reliance on its customers' representations that they owned the offered securities was unreasonable.

Linda Chatman Thomsen, Director of the SEC's Division of Enforcement, observed that:

"Customers now have direct market access platforms such as REDI© and other automated trading systems, which enable brokers to execute larger volumes of trades more quickly and efficiently for their customers. However, as this case makes clear, direct access does not obviate a broker's own responsibilities under the Commission's short sale rules, and it certainly does not allow a broker to ignore apparent discrepancies indicating illegal trading by its customers."

The SEC and NYSE Regulation censured Goldman for its conduct, and compelled the firm to pay $2 million in civil penalties and fines. The SEC Order also directed Goldman to cease and desist from committing or causing any violations or future violations of the Securities Exchange Act.

In determining to accept Goldman's offers of settlement, the SEC and the NYSE considered remedial measures taken by Goldman.

Recommended