Goldman Sachs Group, Inc

Securities Criminal Roundup: Mail Fraud Charges Against Investment Company Owner, Ex-Bank of the Commonwealth Execs Convicted, Broker’s Elder Financial Fraud Sentence is Affirmed, and Ex-Fund President Goes to Prison for Ponzi Scam

Published on: June 7, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Flatiron Systems LLC Owner Pleads Guilty to Mail Fraud

In United States v. Howard, investment company owner David Eugene Howard has pleaded guilty to mail fraud charges. He is accused of engaging in a financial scam that obtained about $1.8 million from investors.

Prosecutors say that Howard, who owns Flatiron Systems, used operating agreements, letters, and account statements to make false representations that his company used a proprietary system named “Pathfinder” to trade pooled equity accounts. The Securities and Exchange Commission has submitted an enforcement action against Howard.

Investor in Goldman Sachs Special Opportunities Fund 2006 to Get $2.5M FINRA Arbitration Award For Allegedly Unsuitable Investment

Published on: May 27, 2013 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority Panel is ordering Goldman Sachs & Co. (GS) to pay about $2.5M to Tracy Landow for recommending that she invest in the Goldman Sachs Special Opportunities Fund 2006, which she is now contending was an investment that was not appropriate for her. Landow filed her arbitration claim against the unit and her broker a couple of years ago, claiming that unauthorized trades were made. She also alleged misrepresentation and failure to supervise.

The FINRA arbitration panel determined that Goldman liable, ordering the financial firm to compensate the claimant with $1.6M in damages plus about $1M in interest and additional fees. Broker John D. Blondel, Jr., however, was not found responsible. The panel determined that he did not play a part in the alleged investment sales-related violation, theft, forgery, misappropriation, or fund conversion and he was not accountable for the private equity fund and the transactions that resulted. It is recommending that his name be expunged from the case.

Meantime, Landow’s interest in the fund will go back to the financial firm within 30 days from the award date.

JPMorgan, Goldman Sachs, Bank of New York Mellon, Charles Schwab Disclose Market-Based NAVs of Money Market Mutual Funds

Published on: February 7, 2013 | by Shepherd Smith Edwards & Kantas, LLP

While regulators continue pondering whether to impose more regulations on money market mutual funds, a number of financial institutions, including Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM), Fidelity Investments, BlackRock Inc. (BLK), Bank of New York Mellon Corp. (BK), Federated Investors Inc. (FII), and Charles Schwab Corp.,(SCHW), started disclosing the market-based net asset values of these funds last month. Reasons given for these disclosures included offering greater transparency and giving investors more information about the market. However, some believe there are firms are issuing these disclosures because that is what their competitors are doing.

Currently, money market funds have a $1/share stable net asset value for all investor transactions. The underlying assets of the funds, which are debt securities with high ratings, however, can undergo periodic, small value changes that may slightly affect a fund’s per share market value. This is also called the shadow price, which are reasonable estimates/fair valuations of the price that an instrument could be sold at in a current trade.

A few years ago, the Securities and Exchange Commission approved modifications to its Rule 2a-7 and other rules about money market funds mandating that managers of the funds reveal changes to portfolio holdings and give the regulator the market-based net asset values of the funds. Fund information for each month has to be given to the SEC at a succeeding month. The Commission then makes the information available to the public 60 days after the month to which the data pertains has concluded. These Daily disclosures would make the data more immediate (and relevant) for investors.

Goldman Sachs Cleared in Securities Fraud Case Against Dragon Systems for Losses Related to $250M Loss in Sale to Lernout & Haspie

Published on: January 31, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In US District Court in Boston, a federal jury has decided that Goldman Sachs (GS) isn’t at fault for the $250M sustained by the owners of Dragon Systems Inc. after they sold their speech recognition company to Lernout & Hauspie Speech Products for $580M. Goldman had served as adviser to Dragon over the deal.

L & H, which is based in Belgium, went bankrupt after the acquisition amidst reports that it was inflating its sales figures and revenue and fabricating customers. The company’s top executives went to jail.

Plaintiffs Janet and James Baker, who own Dragon, had accused Goldman of negligence for failing to detect the fraud that was taking place L & H. Their lawyer claims that the financial firm took the job despite lacking the experience needed to properly sell this type of technology company. Dragon paid Goldman $5 million for its services. (The Bakers have already settled other cases related to the L & H acquisition of Dragon for $70M.

Morgan Stanley & Goldman Sachs Settle Federal Homeowner Foreclosure Complaints for $557 Million

Published on: January 16, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Goldman Sachs (GS) and Morgan Stanley (MS) have agreed to collectively pay $557M to settle complaints accusing them of wrongfully foreclosing on homeowners. Under their respective agreements with the Federal Reserve, Morgan Stanley will pay $227M while Goldman will pay $330M.

Approximately 220,000 people who lost their homes due to “robo-signing” and other abuses could receive compensation as a result. Per the agreement with the two investment banks, they will pay $232 million in cash to compensate homeowners. This will conclude the loan files review against the two banks that were ordered in 2011. Cash payments will vary and may go as high as $125,000 to borrowers whose homes foreclosed in 2009 and 2010. $325M will go toward lowering mortgage balances and forgiving outstanding principal on home sales that made less than what borrowers owed on mortgages.

The deals stuck by Morgan Stanley and Goldman Sachs is similarly structured to the $8.5B one reached last week with JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), PNC Financial Services (PNC), MetLife Bank (MET), SunTrust (STI), Sovereign (SOV), Aurora, and US Bank. They are paying 3.8 million homeowners approximately $3.3 billion to conclude the foreclosure review. $5.2 billion is for forgiveness of principal and mortgage modifications. Ally Financial and HSBC are in talks to work out similar settlements. The Fed reports that now, over 4 million borrowers will receive cash compensation.

CFTC Securities Headlines: Goldman Sachs Fined For Inadequate Broker Supervision in $118M Fraud, Firms Named in Precious Metal Scam, & Defendants to Pay $1.8M Over Off-Exchange Foreign Currency Scheme

Published on: December 14, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Goldman Sachs Fined$1.5 Inadequate Supervision in $118M Fraud
The Commodity Futures Trading Commission says that Goldman Sachs (GS) must pay $1.5M because it did not properly supervise trader Matthew Marshall Taylor, who allegedly got around internal systems to manually make fabricated trades that went straight to the financial firms’ records and books and not the exchange. Taylor is accused of defrauding the bank, which lost about $118.4M.

The agency says that Goldman failed to make sure that its risk management, supervision, and compliance programs were in alignment with its duties to diligently oversee its business as a registrant of the Commission. However, CFTC commissioner Bart Chilton has criticized the $1.5M fine, describing it as a wrist slap.

CFTC Names Firms and Individuals in Precious Metal Scam The Commission has filed a civil injunctive enforcement action against a number of firms, including Hunter Wise Credit, LLC, Lloyds Commodities Credit Company, Hard Asset Lending Group, Blackstone Metals Group, LLC, CD Hopkins Financial, Newbridge Alliance Inc., Harold Edward Martin Jr., United States Capital Trust, LLC, as well as related entities, and Fred Jager, Frank Gaudino, James Burbage, Chadewick Hopkins, Baris Keser, David A. Moore, and John King. They are accused of fraudulently marketing off-exchange commodity contracts that were illegal. Also, Hunter Wise Commodities, which allegedly orchestrated the fraud, is accused of having gotten least $46M in client funds since July of last year.

The defendants allegedly claimed that they were selling physical metals to retail clients in retail commodity transactions and that they would arrange loans for the balance of the purchase price. Customers were supposed to make down payments at 25% of the complete buying price for certain quantities of metal, which were to be placed in a safe depository. The CFTC contends, however, says that not only were certain statements found in the investment contract untrue, but also the transactions were merely paper transactions with no actual metals involved.

Defendants to Pay $1.8M in Off-Exchange Foreign Currency Scheme
Following a CFTC anti-fraud enforcement action, a permanent injunction order and default judgment has been issued against Forex Capital Trading Partners, Inc., Forex Capital Trading Group Inc., and Highland Stone Capital Management, LLC requiring that they pay a penalty of over $1.3M and disgorge $450,764 to benefit clients who were defrauded. The Commission says that the three firms made fraudulent solicitations to 106 clients that invested over $2.8M in forex trading.

These solicitations were allegedly made with false claims that they were engaging in this type of trading had been profitable for several years, including a falsely reported 51.94% customer gain in 2010, which was a year when the investors actually lost over 1.2M. In fact, says the Commission, customers actually lost over 93% of total invested principal via the defendants’ customer trading.

CFTC Press Room

More Blog Posts:
CFTC Commissioner Proposes Plan to Give Futures Customers SIPC-Like Protections, Stockbroker Fraud Blog, August 14, 2012

CFTC Files Texas Securities Fraud Against TC Credit Services and its Houston Owner Over $1.4M Commodity Pool Scam, Stockbroker Fraud Blog, July 17, 2012
SEC and CFTC Say They Found Out About JPMorgan’s $2B Trading Loss Through Media, Stockbroker Fraud Blog, May 31, 2012 Continue Reading ›

Goldman Sachs Ordered to Arbitrate Underwriting Dispute Involving $210M in Auction-Rate Securities

Published on: December 4, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the District of Nevada has rejected Goldman Sachs & Co.’s (GS) bid to arbitrate its dispute with the city of Reno, Nevada. The financial firm had sought to stop a Financial Industry Regulatory Authority proceeding over its underwriting of $210 million in ARS. Per Judge Robert Jones, even though there was no arbitration agreement, that the city paid Goldman to facilitate the securities’ auctions makes Reno a customer of a FINRA firm member for the purposes of arbitration. The case is Goldman Sachs & Co. v. City of Reno.

Recounts the court, Reno had issued about $210 million in auction-rate securities to fund a number of projects in 2005 and 2006. Pursuant to their underwriter and broker-dealer agreements together, Goldman was to underwrite and broker the ARS. While the broker-dealer arrangement included a forum selection clause allowing for any lawsuits stemming from the agreement to be heard in Nevada district court, it did not (nor did the underwriter agreement), come with an arbitration provision.

Reno began FINRA arbitration proceedings against the brokerage firm in early 2012 claiming that Goldman had committed wrongdoing under the terms of the agreements. Goldman countered with this case, requesting that the court find that the FINRA forum was inappropriate for resolving this dispute, per the forum selection clause, and because there was no arbitration clause between the two parties. Goldman also sought preliminary injunction against the proceedings.

The district court said no to the request for relief, observing that a party that wants injunctive relief has to show that success on the merits was likely, which it said Goldman did not do. It also said that, according to FINRA arbitration code, parties have to arbitrate any dispute between a member and its customer that involves the member’s business activities. As for the forum selection clauses found in the broker-dealer agreement, the court said that although these don’t directly address the matter of arbitration, they also don’t disallow for arbitration if that is what is needed.

The court disagreed with Goldman’s contention that FINRA rules don’t apply because the ARS are municipal securities and therefore influenced by Municipal Securities Rulemaking Board rules, which don’t include muni issuers under the customer definition. It pointed out that, according to the SEC, MSRB members are also subject to FINRA arbitration just like FINRA members. Also, Goldman is both an MSRB member and a FINRA member.

Judge Jones noted that even if FINRA finds that Reno’s claims have more to do with the brokerage firm’s underwriting than its auction facilitation services, the issue of arbitrability is for the arbitrator and not the court.

Goldman Sachs & Co. v. City of Reno, D. Nev, Dockets, Justia

Goldman Must Arbitrate Dispute With City of Reno Over ARS Underwriting, Bloomberg BNA, November 30, 2012

More Blog Posts:
Class Action MBS Securities Lawsuit Against Goldman Sachs is Reinstated by 2nd Circuit, Institutional Investor Securities Blog, September 14, 2012

Amerigroup Shareholders Claim Goldman Sachs Advisers’ Had Conflicts of Interest That Influenced $4.5B Sale of Company to WellPoint, Institutional Investor Securities Blog, August 21, 2012

Texas Securities Fraud: BNY Mellon Capital Markets LLC Settles Allegations of Rigged Bond Bidding for $1.3M, Stockbroker Fraud Blog, January 24, 2012 Continue Reading ›

Ex-Goldman Sachs Director Rajat Gupta Pleads Not Guilty to Insider Trading Charges

Published on: October 26, 2011 | by Shepherd Smith Edwards & Kantas, LLP

After surrendering to federal authorities today, Rajat Gupta has entered a not guilty plea to the criminal charges against him involving insider trading. Gupta, who was a former Proctor and Gamble and Goldman Sachs director, is accused of multiple counts of securities fraud and one count of conspiracy to commit securities fraud. He allegedly gave Galleon Group cofounder Raj Rajaratnam corporate secrets about Goldman. Our stockbroker fraud law firm has been following Rajaratnam’s criminal case on our blog site. (See below.) Earlier this month, he was sentenced to 11 years in prison over an insider trading scam that illegally garnered $63.8 million.

Gupta, who also once was a global head at McKinsey & Co., came under close scrutiny during Rajaratnam’s trial when he was brought up in testimony and phone conversations that were recorded in secret. He is also now facing civil charges with the Securities and Exchange Commission, which contends that he provided Rajaratnam with illegal tips about both Proctor and Gamble and Goldman Sachs’ quarterly earnings and an approximately $5 billion investment that Berkshire Hathaway was planning to make in the financial firm. Based on Gupta’s tips, Rajaratnam avoided losses of/made illegal profits of over $23 million. Rajaratnam made over 800,000 in illegal profits from the Berkshire Hathaway tip when, after first having Galleon funds buy over 215,000 Goldman shares, he ordered the liquidation of the Goldman holdings a day after the information and Goldman’s public equity offering became public.

Rajaratnam also made over $18.5 million in illegal profits for Galleon funds after Gupta allegedly told him that Goldman had positive 2008 second quarter financial results. Rajaratnam then had the hedge fund buy Goldman securities but liquidated them when Goldman made news of its earnings for that quarter public. Other charges stem from Gupta allegedly notifying Rajaratnam that fourth quarter results for that same year were negative. The Goldman holdings were sold off, allowing Rajaratnam to avoid over $3 million in losses. When Gupta allegedly tipped him about P & G’s 2008 4th quarter earnings, Rajaratnam had Galleon funds sell short about 180,000 P & G shares, generating over $570,000 in illicit profits.

According to the SEC, Gupta got his confidential information from board conversations while serving as director at both companies. At the time, Gupta had numerous business ties with Rajaratnam and was seeking to strengthen that relationship. Not only had Gupta invested in Rajaratnam’s hedge funds, but they also began a number of financial ventures together.

The SEC had recently dropped its previous administrative action against Gupta over the insider trading allegations. Following that move, he vowed to drop his lawsuit claiming that the regulatory proceeding had violated his constitutional rights.

Of the 56 people that the government has charged with its crackdown on insider trading, 51 either were convicted or pleaded guilty.

With Gupta’s Arrest, Insider Inquiry Goes Beyond Wall St., Dealbook, October 26, 2011
SEC Files Insider Trading Charges against Rajat Gupta, SEC, October 26, 2011
Rajat Gupta, SEC Agree to Drop Galleon-Related Suit, Administrative Action, Bloomberg, August 5, 2011

More Blog Posts:
Galleon Group LLC Co-Founder Raj Rajaratnam Sentenced to 11 Years in Prison Over Insider Trading Scam, Stockbroker Fraud Blog, October 13, 2011
Ex-Goldman Sachs Board Member Accused of Insider Trading with Galleon Group Co-Founder Seeks to Have SEC Administrative Case Against Him Dropped, Institutional Investor Securities Blog, April 19, 2011
Dallas Mavericks Owner Mark Cuban’s Allegations of Misconduct Against the SEC Enforcement Staff are Without Merit, Says Inspector General’s Report, Stockbroker Fraud Blog, October 18, 2011 Continue Reading ›

Whistleblower Lawsuit Claims Taxpayers Were Defrauded When Federal Government Bailed Out Houston-Based American International Group in 2008

Published on: May 5, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Last week, a whistleblower lawsuit claiming that taxpayers were defrauded when the federal government bailed out American International Group was unsealed. The complaint accuses the Houston-based AIG and two banks of taking part in speculative and fraudulent transactions that resulted in losses worth billions of dollars. They then allegedly convinced the Federal Reserve Bank of New York to bail them out with two rescue loans for AIG that were used to unwind hundreds of failed loans.

The complaint focuses on the two emergency loans of about $44 billion that AIG received in October 2008 (The remaining $138 that it got in bailout funds are not part of this case). The money went toward settling trades involving complex, mortgage-linked securities. Some of the AIG-guaranteed securities were underwritten by Goldman Sachs and Deutsche Bank. Both financial institutions join AIG as defendants in this case. The two loans were extended to buy the troubled securities and place them in Maiden Lane II and Maiden Lane III, both special-purpose vehicles, until AIG’s crisis subsided.

The plaintiffs, veteran political activists Nancy and Derek Casady, contend that the rescue loans were improper because the government made them without obtaining a pledge of high-quality collateral from AIG. They maintain that the Fed board does not have the authority to “cover losses of those engaged in fraudulent financial transactions.”

Their whistleblower lawsuit was filed under the False Claims Act. This federal law lets private citizens sue on behalf of government agencies if they know of a fraud that occurred. Plaintiffs are able to attempt to recover money for the government and its taxpayers. Plaintiffs usually receive a percentage if their claim succeeds.

According to the New York Times, senior fed officials have admitted to taking unusual actions in 2008 because the global financial system was on the verge of falling apart.

Related Web Resources:
Claiming Fraud in A.I.G. Bailout, Whistle-Blower Lawsuit Names 3 Companies, The New York Times, May 4, 2011
False Claims Act, Cornell University Law School

Related Web Resources:
Texas Commodity Trading Advisor FIN FX LLC Now Subject to NFA Emergency Enforcement Action, Stockbroker Fraud Blog, April 27, 2011
Texas Securities Fraud: FINRA Suspends Pinnacle Partners Over Failure to Comply with Temporary Cease and Desist Order Involving “Boiler Room” Operation, Stockbroker Fraud Blog, April 19, 2011
SEC is Finalizing Its Whistleblower Rules, Says Chairman Schapiro, Stockbroker Fraud Blog, April 28, 2011 Continue Reading ›

Goldman Sachs Ordered by FINRA to Pay $650K Fine For Not Disclosing that Broker Responsible for CDO ABACUS 2007-ACI Was Target of SEC Investigation

Published on: November 12, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority says it is fining Goldman Sachs $650,000 for failing to disclose that the government was investigating two of its brokers. One of the brokers was Goldman vice president Fabrice Tourre. FINRA says Goldman did not have the proper procedures in place to make sure that this disclosure was made.

The SEC had accused Tourre of being “principally responsible” for Abacus 2007-AC1, a synthetic collateralized debt obligation, and selling the bonds to investors, who ended up losing more than $1 billion while Goldman yielded profits and hedge fund manager John A. Paulson made money from bets he placed against specific mortgage bonds. The SEC contends that Goldman failed to notify investors that Paulson had taken a short position against Abacus 2007-AC1. This summer, Goldman settled for $550 million SEC charges that it misled investors about this CDO, just as the housing market was collapsing.

Regarding Goldman’s failure to disclose that the SEC was investigating two of its brokers, even though investment firms are required to file a Form U4 within 30 days of finding out that a representative has received a Wells notice about the probe, FINRA says that Tourre’s U4 wasn’t amended until May 3, 2010. This date is more than 7 months after Goldman learned about his Well Notice and after the SEC filed its complaint against the investment bank and Tourre. FINRA also says that Goldman’s “employee manual” for brokers does not even specifically mention Wells Notices or the need for disclosure after one is received.

By agreeing to settle with FINRA, Goldman is not admitting to or denying the charges.

Goldman Sachs to Pay $650,000 for Failing to Disclose Wells Notices, FINRA, November 9, 2010
Related Web Resources:
Goldman Fined $650,000 for Lack of Disclosure, New York Times, November 9, 2010
Goldman Sachs Settles SEC Subprime Mortgage-CDO Related Charges for $550 Million,
Stockbroker Fraud Blog, July 30, 2010
Goldman Sachs, Institutional Investor Securities Blog Continue Reading ›