Regulators Probe Goldman Sachs Clearing Unit

The CFTC may bring charges against Goldman Sachs for improperly passing along analysts' tips to top clients.

(May 10, 2011) — In a 10Q released today, Goldman Sachs has disclosed that it is facing fraud charges over whether it improperly used investment accounts to conduct trades.

According to the filing, the Commodity Futures Trading Commission (CFTC) will recommend that the federal regulatory agency bring fraud charges against the banking giant over the firm’s role as clearing broker for an unnamed SEC-registered broker dealer. The CFTC has alleged that Goldman either “knew or should have known” that the broker-dealer’s sub-accounts at Goldman belonged to the dealer’s customers and weren’t the broker-dealer’s own accounts.

Goldman may now face “aiding and abetting, civil fraud and supervision-related charges.” In its quarterly regulatory filing, Goldman noted that the CFTC investigation will focus on Goldman Sachs Execution & Clearing (GSEC), which provides clearing and trade execution services for Goldman clients that include hedge funds, companies, mutual funds and central banks.

The heightened scrutiny by the CFTC illustrates its greater authority under Chairman Gary Gensler, a former Goldman Sachs executive appointed by President Obama. Late last month, as part of the Dodd-Frank law, financial regulators approved a 300-page proposal to define a new swaps plan, specifying the roles of the Securities and Exchange Commission (SEC) and the CFTC.

The disclosure also comes weeks after the European Commission indicated that it was investigating the role of 16 investment banks, including Goldman, Royal Bank of Scotland and Barclays, into their influence over credit default swaps (CDS).

Last year, Goldman Sachs spent $500 million to settle civil fraud charges brought by the SEC, which accused the banking giant of failing to disclose conflicts in mortgage securities that cost investors more than $1 billion and fueled the worst financial crisis since the Great Depression. While the housing market crumbed, the suit said, Goldman profited by betting against the mortgage investments it marketed to its customers.



To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

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