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Regulation and Compliance > Federal Regulation > FINRA

Goldman Loses Appeal on $20M FINRA Clearing Case

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Goldman Sachs saw its appeal of a FINRA arbitration award struck down Tuesday, when the $20.6 million decision was upheld in favor of creditors of the Bayou Group.

Goldman, which acted as a clearing broker and prime broker for hedge funds associated with the Bayou Funds, an alleged Ponzi scheme that collapsed in 2005 and entered bankruptcy in 2006, was originally ordered to pay the award by a three-member FINRA panel on June 24, 2010.

Court documents indicated that the panel’s decision regarded Goldman as an “initial transferee” of the two sets of deposits at issue, and not as a mere avenue of transfer of funds having no control over them. Goldman challenged the decision, first by petitioning the U.S. District Court for the Southern District of New York. That court instead confirmed the award through a cross-petition.

Then Goldman appealed the decision to the U.S. Court of Appeals for the Second Circuit, but saw the decision upheld by the appeals court. Goldman had argued in its appeal that the arbitration decision was in “manifest disregard of the law.”

The firm also said that $6.7 million that was transferred from outside accounts to Bayou funds from June 2004 to June 2005 was not an initial transferee, and therefore not recoverable from Goldman Sachs. It further argued that $13.9 million that was transferred from one Bayou fund to four new Bayou funds in March of 2003 was not a conveyance, because it represented one fund.

However, the court did not agree. In its decision, it said in part, “The manifest disregard standard is, by design, exceedingly difficult to satisfy, and Goldman has not satisfied it in this case.”

SIFMA, which had filed documents in the case in October of 2011, said in those filings that a ruling against Goldman Sachs would have a far-reaching impact on clearing brokers.

“By implicitly characterizing a clearing broker as an ‘initial transferee’ under the Bankruptcy Code, places substantial economic and quasi regulatory burdens on all clearing brokers, burdens which the SEC and industry regulations as well as the courts have specifically rejected,” SIFMA said. Pointing out that under SEC regulations, broker-dealers are forbidden to have “dominion and control” over customer monies in their possession, it added that if BDs were tasked with additional responsibilities in investigating customer funds, they would be hindered in the quick clearing and execution of transactions.


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