Goldman Fined $27 Million for U.K. Reporting Lapses

Published on 15 Sep 2010 under category: article

By Lindsay Fortado and Christine Harper

Published by businessweek.com on September 09, 2010

Sept. 9 (Bloomberg) -- Goldman Sachs Group Inc.’s London unit was fined 17.5 million pounds ($27 million) for failing to notify the U.K.’s financial regulator about a U.S. Securities and Exchange Commission investigation.

Goldman Sachs agreed to pay $550 million in July to settle the SEC’s fraud lawsuit over how it marketed a collateralized debt obligation. The Financial Services Authority fined the New York-based bank today for failing to report to U.K. regulators the U.S. investigation that led to the suit, according to an FSA statement. The firm qualified for the agency’s standard 30 percent discount for cooperating.

“GSI did not set out to hide anything, but its defective systems and controls meant that the level and quality of its communications with the FSA fell far below what we expect,” FSA enforcement chief Margaret Cole said in the statement.

The SEC sued Goldman Sachs and employee Fabrice Tourre in April over claims the firm misled investors in a collateralized debt obligation linked to subprime mortgages, known as the Abacus transaction. The FSA said in April it would investigate Goldman Sachs International in London after the SEC filed its lawsuit. Gordon Brown, the prime minister at the time who was facing a May election, called on the FSA to investigate.

Goldman Sachs created and sold the CDOs in 2007, as the U.S. housing market faltered, without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against the investment vehicles, the SEC said in the April 16 lawsuit. CDOs are pools of assets such as mortgage bonds packaged into new securities.

Still an Employee

“We’re pleased the matter is resolved,” Goldman Sachs spokeswoman Fiona Laffan said following the FSA announcement. Tourre “remains an employee on paid leave,” she said.

Beginning in August 2008, the SEC spent a year obtaining documents and witness testimony about Abacus, including interviewing London-based employees, the FSA said. In September 2009, the SEC told Goldman Sachs and Tourre, who began working at the bank’s London office in November 2008, that it was planning an enforcement action. The bank’s compliance department in London only learned of the SEC investigation when it filed the lawsuit this year, the FSA said.

“From Goldman Sachs’s perspective, the fine might seem high, but they’re essentially being handed a clean slate in terms of any wrong behavior,” said Dan Hyde, a lawyer at Cubism Law in London. “It’s clearly an attempt by the FSA to send out a warning shot to say you need to be aware.”

JPMorgan Fine

The fine is the second-largest levied by the FSA. JPMorgan Chase & Co. received the largest FSA penalty in June when its London unit was fined 33.3 million pounds for not properly segregating client money from the firm’s accounts.

The FSA is “trying to ramp themselves up as a watchdog with teeth,” Hyde said. “The SEC has always been the more serious player.”

The Goldman Sachs U.S. settlement included a $300 million fine and $250 million in restitution for investors. The penalty is the largest ever levied by the SEC against a Wall Street firm, the agency said. Goldman Sachs, without admitting or denying wrongdoing, acknowledged it made a “mistake” and that marketing materials for the CDOs had “incomplete information,” the SEC said.

Tourre, 31, remains a defendant in the U.S. case. His FSA authorization was suspended in April at the bank’s request. The SEC allegations related to when he worked in New York.