Goldman Sachs has been ordered to pay more than $20 million to creditors of collapsed hedge fund Bayou Group, who had accused the firm of failing to investigate signs that Bayou was a Ponzi scheme.
A Financial Industry Regulatory Authority arbitration panel did not offer an explanation of its decision, but sided with the 200 unsecured creditors who had sued Goldman Sachs Execution and Clearing, awarding them $20.5 million. Those creditors accused the firm of “either gross negligence or a willful choice to ignore signs of fraud” which wound up costing investors more than $400 million when Bayou collapsed in 2005.
It is the largest arbitration award ever ordered at a securities firm.
Goldman cleared Bayou’s trades. The firm claims that $20.5 million at issue was never in its possession and was fraudulently transferred between Bayou accounts.
Goldman said it was considering its options. The firm can appeal the arbitration decision in the courts.
“We are very pleased that investors are getting all their money back,” Ross Intellisano, a lawyer for the unsecured creditors committee, said. “Firms like Goldman Sachs should not be allowed to stick their head in the sand when a fraud is going on.”
Three Bayou executives were sent to prison in the wake of the fraud, most notably co-founder Samuel Israel, who went on the lam for three weeks after being sentenced to 20 years in prison for his role in the Ponzi scheme.