Goldman Sachs Affiliate Agrees To Pay $2 Million in Fines and Penalties Over Short-Sale Scheme Charges by NYSER and the SEC

NYSE Regulation Inc. and the Securities and Exchange Commission say that a clearing affiliate and prime broker of Goldman Sachs Group will pay $2 million in fines and penalties over its alleged role in an illegal short-sale trading scheme that was executed by Goldman Sachs customers through their accounts with the brokerage. Goldman Sachs Execution and Clearing, LP has not admitted to or denied any wrongdoing by agreeing to the censure. They are, however, agreeing to cease and desist from future violations.

The SEC charges that firm customers unlawfully sold securities short right before public offerings of the companies’ securities. It is accusing Goldman of violating the rules that mandate that brokers must mark sales short or long, while restricting stock loans on long sales. Both NYSER and SEC say that if Goldman had proper procedures in place, it would have discovered via its own records this illegal activity by its customers. Two Goldman customers have already settled SEC charges connected to their alleged participation in these activities.

SEC Chairman Christopher Cox told the U.S. Chamber of Commerce on the day of this announcement that the commission and its senior staff members are very concerned about abusive naked short-selling. He admitted that Regulation SHO had not properly addressed these issues and that the commission will now eliminate the regulation’s grandfather provision. Cox said that naked short-selling was connected to settlement and clearance systems and that the SEC would use technology to further deal with this issue. He said the action against Goldman was important.

The SEC says that customers used the firm’s REDI System (the automated trading system for broker dealers and their direct market-access) to make sell orders, which Goldman then executed as long sales. Customers, however, had sold the securities short and did not have the securities upon the settlement date. Goldman then delivered borrowed and proprietary securities to brokers so that the buyers could settle the customers “long sales.” Both NYSER and the SEC are in agreement that Goldman was unreasonable to rely on the customers’ representations that the offered securities belonged to them.

SEC Enforcement Director Linda Chatman Thomsen says that brokers are not allowed to ignore obvious discrepancies of illegal trading by its customers even though the latter now has direct market access platforms that let brokers execute bigger volumes of trade more efficiently and rapidly for customers. The SEC says that brokers are mandated to investigate a customer’s trading activities if significant disparities indicate that a customer may be lying to a broker about its representations.

NYSER Executive Vice President of Enforcement Susan Merrill says that blind reliance on customer representations that a sale is long when securities are being sold is not appropriate if a firm sees evidence of short selling.

The SEC says that since March 2000, patterns of trading by the customers and Goldman’s own records indicated that the customers were selling securities short and violating the 1934 Securities Exchange Act Rule 105 and Rule 10a-1(a). Goldman’s records, according to the SEC, also indicate that customers covered their short positions with securities they bought in follow-on and secondary offerings after the sales. The SEC says that Goldman could have noticed these trading disparities if they had the proper procedures in place to do so. NYSER says Goldman neglected to reasonably supervise its business activities.

Over the years, Shepherd Smith and Edwards has represented thousands of investors who have lost investments because of the inappropriate actions of stockbrokers and their firms. Contact Shepherd Smith Edwards & Kantas LTD LLP for your free consultation.

Related Web Resources:
SEC Administrative Order (PDF)

Goldman Sachs Execution and Clearing

Securities Exchange Act of 1934