Securities Industry Group Backs Goldman’s Bayou Appeal

Aug 10 2010 | 10:57am ET

Goldman Sachs isn’t the only one that doesn’t want it to pay a record arbitration award to creditors of a collapsed hedge fund.

Warning that the Financial Industry Regulatory Authority’s award in the case “has potentially industrywide implications, especially for clearing brokers,” the Securities Industry and Financial Markets Association filed a brief supporting Goldman’s bid to have the award thrown out. Goldman was ordered to pay 200 unsecured creditors of the Bayou Group, which collapsed five years ago, $20.5 million. The creditors alleged that Goldman Sachs Execution and Clearing was guilty of “either gross negligence or a willful choice to ignore the signs of fraud.”

The $20.5 million is the largest award ever ordered against a securities firm.

Goldman appealed the FINRA arbitration panel’s decision, arguing that the money in question was never actually in its possession and that the panel “manifestly disregarded the law.” SIFMA agrees.

“In imposing liability on Goldman, the arbitrators disregarded the long-recognized principle that a clearing firm cannot be liable for merely processing transactions received from an authorized source,” it wrote.

“If clearing firms were required to analyze trading in introduced accounts, or to make determinations concerning whether the records and documents in their possession regarding the activities of an introducing firm’s customers indicated possible wrongdoing, the speed and efficiency demanded in the contemporary securities markets would not be possible,” SIFMA added.

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