Goldman Sachs International has been ordered by the United Kingdom’s Financial Services Authority to pay $27 million. The FSA says that Goldman failed to notify it about the US Securities and Exchange Commission’s probe into the investment bank’s marketing of the Abacus 2007-AC1 synthetic collateralized debt obligation, a derivative product tied to subprime mortgages.
Goldman Sachs and Co. has settled the SEC’s case for a record $550 million dollars. However, even though Goldman knew for months in advance that SEC charges were likely, the investment bank did not notify regulators, shareholders, or clients.
FSA’s Enforcement and Financial Crime Managing Director Margaret Cole says that while GSI didn’t intentionally hide the information, it became obvious that the investment firm’s reporting systems and controls were defective and that this was why its ability to communicate with FSA was well below the level of communication expected. Cole says that large institutions need to remember that their reporting obligations to the FSA must stay a priority.
FSA contends that Goldman was in breach of FSA Principle 2, which says that a firm has to “conduct its business with due skill, care, and diligence,” FSA Principle 3, which talks about a firm’s responsibility to “organize and control its affairs responsibly and effectively, with adequate risk management systems,” and FSA Principle 11, which stresses a firm’s responsibility to disclose to the FSA that “of which it would reasonably expect notice.”
For example, Fabrice Tourre, a Goldman vice president that worked on the Abacus team and who became an FSA-approved person after he was transferred to GSI in London, was later slapped with SEC civil charges. Along with Goldman, the SEC accused Tourre of alleged misrepresentations and material omissions in the way the derivatives product was marketed and structured.
Cole notes that FSA was disappointed that even though senior members of GSI in London were aware that Tourre had received a Wells Notice that SEC charges were likely, they did not take into account the regulatory implications that this could have for the investment firm. Because of the failure to notify, Tourre ended up staying in the UK and continued to perform at a “controlled function for several months without further enquiry or challenge.”
Because FSA did not find that GSI purposely withheld information, the investment bank received a discount on the fine, reducing it from $38.5 million to the current amount.
Securities fraud lawsuits and investigations have followed in the wake of the SEC’s case against Goldman.
Related Web Resources:
FSA fines Goldman Sachs £17.5 million, Reuters, September 9, 2010
Goldman Sachs Settles SEC Subprime Mortgage-CDO Related Charges for $550 Million, Stockbroker Fraud Blog, July 30, 2010