Goldman Sachs has lost at every turn its battle with creditors of the collapsed Bayou Group hedge funds. But the bank is now taking a different tack.
After fighting a $20.6 million arbitration award against it for two years, Goldman finally paid up at the end of last month. But the bank turned around and immediately asked for its money back—claiming that the award by the Financial Industry Regulatory Authority arbitration panel makes it a victim of the $400 million fraud, and therefore an unsecured creditor.
"Our claim is consistent with bankruptcy law," Goldman spokesman Michael DuValley said in a statement. "The arbitration panel, which was not ruling on wrongdoing, determined that money the Bayou funds deposited with us while insolvent needed to be returned to the estate to distribute to creditors. With the ruling, we became a creditor entitled to compensation along with the other victims of the fraud."
"We were harmed by the Bayou funds and those funds should bear responsibility for the actions we took on their behalf and at their direction. At the end of the day, it was their fraudulent behavior that was the principal cause of any damage suffered by Bayou investors."
Bayou's creditors had argued that Goldman Sachs Execution and Clearing, which cleared trades for Bayou, which collapsed five years ago, showed "either gross negligence or a willful choice to ignore signs of fraud."
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."
Three weeks later, Goldman paid the Bayou Hedge Funds litigation trust and filed its claim against the trust in bankruptcy court.
"The Bayou victims are extremely disappointed that Goldman's bankruptcy court tactics will further delay the distribution of millions of dollars back to the investors," a lawyer for the creditors, Ross Intelisano, told The New York Times. "If Goldman thought they can just go to bankruptcy court and get the $20.7 million back after they lost three times, we're surprised they didn't mention that to the arbitrators, Judge Rakoff or the Second Circuit."