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Last updated: September 9, 2010 11:02 pm
Goldman Sachs had a choice when settling a five-month investigation by the Financial Services Authority launched in the wake of a high-profile US fraud case – swallow a larger fine, or accept a potentially more withering critique of its compliance practices. They chose the big fine.
The £17.5m sanction handed down by the FSA for control failings at the investment bank relating to how information about the US probe was shared may sound like small change for an institution as profitable as Goldman, but it is the second-largest fine in the regulator’s history.
Having seen its reputation battered in recent months by a series of controversies, the bank was understandably keen to limit the public relations damage while drawing a line under the UK investigation. But it shows that Goldman is continuing to pay a hefty – some say inflated – price for becoming the pantomime villain of the financial crisis.
The bank paid $550m in July to settle the US Securities and Exchange charges that it misled investors in a complex subprime mortgage-backed product known as Abacus, without admitting or denying the agency’s allegations.
While that sum was less than some analysts had expected, it was a bitter pill to swallow for the sizeable contingent of Goldman executives who thought the SEC’s case was weak.
The FSA’s inquiry, which was opened days after the US charges were announced, was brushed off by some at the time as a way for the soon-to-be-disbanded agency to save face after it emerged that Fabrice Tourre, the Goldman trader whose brash e-mails about the Abacus deal were at the heart of the SEC’s complaint, was working in London at the time of the US regulator’s investigation. But the FSA’s findings, detailed in Thursday’s 20-page penalty notice, are far from trivial, lawyers who specialise in financial services said.
Goldman’s failure to co-ordinate and share information about the US investigation between New York and London meant that the bank’s UK head of compliance first learnt about the case from the media, when the SEC filed its charges on April 16.
With UK compliance unaware of the probe, Goldman also failed to inform the FSA that the SEC was considering filing an enforcement case against Mr Tourre, in spite of the fact that he was registered as an “approved person” with the UK regulator.
“This is a fairly fundamental systems and controls failure,” said a regulatory lawyer who declined to be named because his law firm does business with Goldman. “Given the serious nature of the failing, in this case the fine is justified.”
Mr Tourre is still fighting the charges filed against him by the SEC, and his lawyer declined to comment on the FSA case.
Lawyers said that the fact that no senior Goldman executives are mentioned by name in the penalty notice, as well as the fact that the regulator concluded that the bank did not “deliberately withhold information” from the FSA, smacked of some horse-trading between the two sides.
The findings are unlikely to bolster lawsuits brought by Goldman shareholders in the US, who claim the bank should have disclosed the existence of the SEC probe far earlier.
Goldman’s share price dropped nearly 12 per cent when the SEC unveiled its complaint.
“It looks like a fairly sizeable fine, but they were given quite a good reference that it was purely a failure to self report rather than something intentional,” said Dan Hyde, a lawyer with litigation boutique cubism.
The FSA has recently stepped up its emphasis on regulatory control cases, bringing a raft of actions against banks for systemic faults such as failing to keep client money separate and inaccurate transaction reporting. The size of Goldman’s fine indicates that the regulator regards timely reporting as an equally serious compliance function.
“This penalty should send a message – particularly to the senior management of large institutions – of the need to have their firm’s UK reporting obligations at the forefront of their minds,” said Margaret Cole, the FSA’s managing director of enforcement and financial crime.
With regard to Goldman’s handling of the Abacus investigation, the FSA said that it was also handing down such a large fine because the bank is so well-resourced and is expected to have top-notch compliance procedures in place.
“Goldman Sachs is a highly sophisticated firm and among the world’s premier financial institutions,” the final notice said. “The firm itself and its legal and compliance functions are integrated on a global basis and the senior management of those functions are (or ought to be) in constant communication with each other.”
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