SEC, NYSE Cry Foul Against Goldman Sachs Unit

Mar 15 2007 | 3:12pm ET

As March Madness gets underway, Wall Street titan Goldman Sachs has been hit with a flagrant foul by the guys in stripes, the Securities and Exchange Commission and NYSE Regulation. The market referees this week settled separate enforcement proceedings against a prime brokerage and clearing affiliate of Goldman for an allegedly illegal trading scheme carried out by its customers through their accounts at the firm.

Both proceedings found that Goldman’s customers profited by illegally shorting securities prior to public offerings of those securities. In connection with the illegal short sales, the SEC and NYSE found that the affiliate, Goldman Sachs Execution and Clearing, violated the regulations requiring brokers to accurately mark sales “long” or “short” and restricting stock loans on long sales.

Specifically, the customers, which have not been identify, allegedly placed their sell orders to the firm's direct market access automated trading system, falsely marking the orders "long." Goldman, relying solely on its customers’ honesty, 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.

The SEC and NYSE further found that, while Goldman had instituted and maintained appropriate procedures, it could have discovered its clients' shenanigans and saved itself from public embarrassment.

Goldman, for its alleged ignorance, has been ordered to pay $2 million in civil penalties and fines, and has consented to the order without admitting or denying the charges.


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