Wednesday, March 14, 2007
The Securities and Exchange Commission and NYSE Regulation, Inc. today settled separate enforcement proceedings against a prime broker and clearing affiliate of The Goldman Sachs Group, Inc. for its violations arising from an illegal trading scheme carried out by customers through their accounts at the firm. Both proceedings find that firm customers traded and profited by illegally selling securities short just prior to public offerings of the companies’ securities. In connection with the illegal short sales, the SEC and the NYSE found that the affiliate, Goldman Sachs Execution and Clearing L.P. (Goldman), violated the regulations requiring brokers to accurately mark sales long or short and restricting stock loans on long sales. The SEC and the NYSE further found that, if Goldman had instituted and maintained appropriate procedures, it could have discovered through its own records the customers’ illegal activity.
The SEC’s Order and the NYSE Decision against Goldman find that for more than two years, beginning in March 2000, the customers’ pattern of trading and Goldman’s own records reflected that they were selling the securities short in violation of Rule 105 and Rule 10a-1(a). The customers did not deliver to Goldman in time for settlement the securities they purported to sell long, but rather, had to borrow the securities from Goldman to settle all of their sales. Goldman’s records also reflected that its customers covered their short positions with securities purchased in follow-on and secondary offerings after executing their sales. Had Goldman instituted and maintained procedures reasonably designed to detect these significant trading disparities, it could have discovered the pattern of unlawful trades by its customers.
The SEC Order and the NYSE Decision censure Goldman for its conduct and compel the firm to pay $2 million in civil penalties and fines. In determining to accept Goldman’s offers of settlement, the SEC the NYSE considered remedial measures taken by Goldman.
The SEC previously brought a settled civil injunctive action against two of Goldman’s customers who had engaged in the illegal short sales and who, pursuant to the settlement, paid over $1 million in disgorgement and civil penalties.