Judges Junk Goldman's Bayou Appeal

Jul 5 2012 | 10:52am ET

A federal appeals court has rejected Goldman Sachs' appeal of a $20.6 million arbitration award stemming from the Bayou Group hedge fund scandal.

A three-judge panel of the U.S. Second Circuit Court of Appeals ruled that the bank, which cleared trades for Bayou, did not meet the "manifest disregard standard;" Goldman claimed the Financial Industry Regulatory Authority arbitration panel ignored the law.

"The manifest disregard standard is, by design, exceedingly difficult to satisfy, and Goldman has not satisfied it in this case," the judges ruled.

The FINRA panel's award, to Bayou's unsecured creditors, is the largest ever levied against a securities firm. Bayou's unsecured creditors alleged that Goldman Sachs Execution and Clearing, which cleared trades for Bayou, showed "either gross negligence or a willful choice to ignore signs of fraud." Bayou collapsed five years ago, costing investors more than $400 million.

The Second Circuit ruling upheld a lower court decision, in which U.S. District Judge Jed Rakoff wrote that Goldman had "voluntarily" agreed to arbitration and "must suffer the consequences."

It is unclear whether Goldman will further appeal the ruling by seeking a hearing by the full Second Circuit.

Bayou's creditors are "gratified that they're getting closer to having some of their losses covered by this victory," a lawyer for the group, John Rich, said.

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