Goldman Sachs

Goldman Sachs and Wells Fargo Investments Repurchase $26.9M in Auction-Rate Securities from New Jersey Investors

Published on: May 25, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to the New Jersey Bureau of Securities, Wells Fargo Investments Inc. (WFC) and Goldman Sachs & Co. (GS) has repurchased $26.9 million in ARS tosettle securities allegations that they sold auction-rate securities to New Jersey investors without disclosing the risks involved. Goldman bought back $25.5 million in ARS (it will also pay a $959,794 civil penalty), while Wells Fargo Investments repurchased $1.37 million in ARS.

The Bureau says that Goldman Sachs did not properly supervise and train its salespeople to make sure that all of its clients knew of the mechanics involved in the auction market and that the ARS could become illiquid. The financial firm also is accused of failing to disclose to investors the risks involved in buying or owning ARS even as it was becoming aware that the market was in trouble. The Bureau also accused Wells Fargo Investments of not properly supervising or training its agents that marketed the securities.

The two Consent Orders against Goldman Sachs and Wells Fargo Investments are the 11th and 12th that the state’s Bureau of Securities has reached with financial firms over ARS that were sold to investors in New Jersey. As part of the settlements, several firms that sold and marketed ARS have offered to buy back $2.8 billion of these securities.

It was in 2008 that state offices started getting complaints from investors about problems related to ARS investments. New Jersey was one of the 12 states that became part of a task force that looked into whether financial firms misled investors that bought ARS, which were sold and marketed as liquid, safe, and like cash. When the ARS market did fail, many investors were unable to access their money as the securities became illiquid.

New Jersey Bureau of Securities

More Blog Posts:
Anschutz Corp.’s Securities Fraud Lawsuit Against Deutsche Bank and Credit Rating Agencies Over Their Alleged Mishandling of Auction-Rate Securities Can Proceed, Says District Court, Institutional Investor Securities Blog, April 21, 2011

Akamai Technologies Inc’s ARS Lawsuit Against Deutsche Bank Can Proceed, Institutional Investor Securities Blog, March 4, 2011

Auction-Rate Securities Investigations by SEC and NY Attorney General Are Ongoing, Stockbroker Fraud Blog, April 21, 2011

Securities Practices of JPMorgan Chase & Goldman Sachs Under Investigation by Federal Investigators

Published on: May 19, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Federal investigators are taking an even closer took at the securities-related practices of JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS ). In a May 6 Filing with the Securities and Exchange Commission, JPMorgan reported that an investigation into its municipal derivatives securities practices is being conducted by the SEC, the US Justice Department, the Office of the Comptroller of the Currency, the Internal Revenue Service, and a number of state attorneys general. The investment bank and Bear Stearns are under investigation for possible tax, antitrust, and securities-related violations related to “the sale or bidding of guaranteed investment contracts and derivatives to municipal issuers.” The SEC’s Philadelphia office is recommending that the commission file civil charges against JPMorgan.

Meantime, in its May 9 filing to the SEC Goldman Sachs revealed that the Commodity Futures Trading Commission is looking at the clearing-services practices that Goldman subsidiary Goldman Sachs Execution and Clearing LP provided to a broker-dealer. Goldman is also being investigated by the Justice Department over matters “similar” to a European Commission probe into anti-competitive practices involving credit default swap transactions.

Goldman’s filing notes that CFTC staffers verbally notified GSEC that it will recommend that the commission bring charges related to supervision, aiding and abetting, and civil fraud over the financial firm providing a broker-dealer client with clearing services. The charges are being recommended because of allegations that GSEC knew or should have known that subaccounts belonged to the broker-dealer’s customers and were not the client’s “proprietary accounts.”

Related Web Resources:

Wall Street inquiry expands beyond Goldman Sachs, Los Angeles Times, May 14, 2011

Office of the Comptroller of the Currency

Commodity Futures Trading Commission

More Blog Posts:

Motion for Class Certification in Lawsuit Against J.P. Morgan Securities Inc. Over Alleged Market Manipulation Scam Granted in Part by Court, Stockbroker Fraud Blog, July 23, 2010

Ex-Goldman Sachs Board Member Accused of Insider Trading with Galleon Group Co-Founder Seeks to Have SEC Administrative Case Against Him Dropped

Published on: April 19, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Our securities fraud attorneys had previously reported on the Securities and Exchange Commission’s case against Rajat Gupta, an ex-Goldman Sachs board member accused of passing on confidential information to Galleon Group Co-Founder Raj Rajaratnam about Berkshire Hathaway Inc.’s $5 billion investment in Goldman Sachs. Rajaratnam is accused of making $45 million from the scheme, which has been the target of what is being called one of the largest insider trading crackdowns involving a hedge fund. As part of its Galleon probe, the SEC has filed insider trading lawsuits against at least two dozen businesses and individuals.

The SEC is accusing Gupta of sharing with Rajaratnam details about the respective quarterly earnings of the investment bank and Proctor and Gamble, where Gupta also served as a director. Last month, agency filed its charges insider trading allegations against Gupta in administrative forum—a move that he is contesting.

On March 18, the ex-Goldman Sachs board member filed a lawsuit against the SEC denying the insider trading allegations and asking the federal court to block the SEC’s administrative claims and grant him a jury trial. Gupta contends that the SEC allegations took place at least a year and a half before the Dodd-Frank Wall Street Reform and Consumer Protection Act gave regulators permission to file such an action.

The Dodd-Frank Act has given the SEC the authority to use administrative proceedings to get monetary penalties from all individuals, regardless of whether or not they are connected to regulated entities. The SEC’s administrative trial in the Gupta case is scheduled for July 18. Gupta is the only defendant in the Galleon case that the SEC is pursuing administratively. He is a non-regulated person.

Related Web Resources:
Gupta Says U.S. Judge in New York Should Handle Suit to Block SEC’s Action, Bloomberg, April 11, 2011

Ex-Goldman director charged with insider trading, CBS News, March 1, 2011

Gupta v. Securities and Exchange Commission, Justia Docket Filings

U.S. v. Rajaratnam, SD New York 2011

More Blog Posts:
A Texan is Among Those Arrested in Insider Trading Crackdown Involving Apple Inc., Dell, and Advanced Micro Devices’ Confidential Data, Stockbroker Fraud Blog, December 16, 2010

3 Hedge Funds Raided by FBI in Insider Trading Case, Stockbroker Fraud Blog, November 23, 2010

Ex-Goldman Sachs Associate Will Serve Nearly Five Years in Prison for Insider Trading, Stockbroker Fraud Blog, January 10, 2008

Goldman Sachs Group Made Money From Financial Crisis When it Bet Against the Subprime Mortgage Market, Says US Senate Panel

Published on: April 15, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Senate’s Permanent Subcommittee on Investigations says that because Goldman Sachs Group Inc. bet billions against the subprime mortgage market it profited from the financial crisis. The panel’s findings come following a two-year bipartisan probe and were released in a 639-page report on Wednesday.

The subcommittee released documents and emails that show executives and traders attempting to get rid of their subprime mortgage exposure, which was worth billions of dollars, and short the market for profit. Their actions ended up costing their clients that purchased the financial firm’s mortgage-related securities.

The panel says that Goldman allegedly deceived the investors when failing to tell them that the investment bank was simultaneously shorting or betting against the same investments. The subcommittee estimates that Goldman’s bets against the mortgage markets in 2007 did more than balance out the financial firm’s mortgage losses, causing it to garner a $1.2 billion profit that year in the mortgage department alone. Also, when Goldman executives, including Chief Executive Lloyd Blankfein appeared before the committee in 2010, the panel says that they allegedly misled panel members when they denied that the financial firm took an a position referred to as being “net short,” which involves heavily tilting one’s investments against the housing market.

It was just last year that the Securities and Exchange Commission ordered Goldman to pay $550 million to settle securities fraud charges over its actions related to the mortgage-securities market. The allegations in this report go beyond the claims covered by the SEC case. The report also names mortgage lender Washington Mutual, credit rating firms, the Office of Thrift Supervision, and a federal bank regulator as among those that contributed to the financial crisis.

Goldman is denying many of the subcommittee’s claims and says its executives did not mislead Congress.

Related Web Resources:
Goldman Sachs shares drop on Senate report, Reuters, April 14, 2011

Senate Panel: ‘Goldman Sachs Profited From Financial Crisis’, Los Angeles Times, April 14, 2011

Senate Permanent Subcommittee on Investigations

More Blog Posts:
Goldman Sachs Sued by ACA Financial Guaranty Over Failed Abacus Investment for $120M, Institutional Investor Securities Blog, January 10, 2011

Goldman Sachs Settles SEC Subprime Mortgage-CDO Related Charges for $550 Million, Stockbroker Fraud Blog, July 30, 2010

Goldman Sachs COO Says Investment Firm Shorted 1% of CDOs Mortgage Bonds But Didn’t Bet Against Clients, Stockbroker Fraud Blog, July 14, 2010

Goldman Sachs Reports $3.4 Billion in “Reasonably Possible” Losses from Legal Claims

Published on: March 2, 2011 | by Shepherd Smith Edwards & Kantas, LLP

In its latest 10-K filing with the US Securities and Exchange Commission, Goldman Sachs Group Inc. says that its “reasonably possible” losses from legal claims may be as high as $3.4 billion. The investment bank’s admission comes after the SEC told corporate finance chiefs that the should disclose losses “when there is at least a reasonable possibility” they may be incurred regardless of whether the risk is so low that reserves are not required.

Goldman admits that it hasn’t put side a “significant” amount of funds against such possible losses and its estimate doesn’t factor in possible losses for cases that are in their beginning stages. The $3.4 billion figure comes from a calculation of three categories of possible liability. Also factored in were the number of securities sold in cases where purchasers of a deal underwritten by Goldman Sachs are now suing the financial firm and cases involving parties calling for Goldman Sachs to repurchase securities.

Between 2009 and 2010, the financial firm reported a 38% decline in net income from $13.4 billion to $8.35 billion. Trading revenue dropped while non-compensation expenses, which were affected by regulatory proceedings and litigation, went up 14%. It was just last year that the investment bank paid $550 million to settle SEC charges that it misled investors when selling a mortgage-linked investment in 2007. Goldman Sachs is still contending with state and federal securities complaints alleging improper disclosure related to mortgage-related products. As of the end of 2010, estimated plaintiffs’ aggregate cumulative losses in active cases against Goldman Sachs was at approximately $457 million.

Related Web Resources:
Goldman Sachs Puts ‘Possible’ Legal Losses at $3.4 Billion, Bloomberg Businessweek, March 1, 2011

Form 10-K, SEC

Goldman Sachs Settles SEC Subprime Mortgage-CDO Related Charges for $550 Million, Stockbroker Fraud Blog, July 30, 2010

Ex-Goldman Sachs Broker’s Request for SEC Help in Obtaining Documents from Germany Denied by District Court

Published on: February 17, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of New York says it will not direct the Securities and Exchange Commission to contact German authorities on behalf ex-Goldman Sachs & Co. (GS) executive Fabrice Tourre, who is seeking to obtain certain documents related to the securities fraud case against him. Per Magistrate Judge Michael Dolinger’s ruling, a discovery request based on Federal Rule of Civil Procedure 34(a) doesn’t “extend” to having a
“government agency make requests to a foreign government under the terms of” a memorandum of understanding between both parties. Dolinger notes that while MOU between the SEC and its German equivalent allows both regulators to help each other in the enforcement of their respective securities laws, “there is no indication” that the MOU is supposed to offer a right or a benefit to a private party, such as allowing a securities fraud litigant to obtain discovery in Germany.

The SEC charged Goldman Sachs and Tourre over alleged misstatements and omissions related to collateralized debt obligations called Abacus 2007-AC1, a derivative product linked to subprime mortgages. The broker-dealer settled its securities case for $550 million. Meantime, Tourre, who is accused of giving Goldman Sachs “substantial assistance” in its alleged efforts to mislead investors, is seeking to have the SEC case against him dismissed. He is pointing to Morrison v. National Australia Bank Ltd., a US Supreme Court decision that was issued two months after the SEC filed charges against him.

This week, his lawyers argued that the SEC was attempting to circumvent the Supreme Court ruling, which limits the reach of civil claims over acts that occurred outside the country. The transactions involving Tourre that are under dispute took place abroad.

Goldman’s Tourre Shouldn’t Face SEC Lawsuit, His Lawyers Say, Bloomberg Businessweek, February 15, 2011

The SEC Complaint (PDF)

Goldman Sachs Sued by ACA Financial Guaranty Over Failed Abacus Investment for $120M

Published on: January 10, 2011 | by Shepherd Smith Edwards & Kantas, LLP

ACA Financial Guaranty Corporation is seeking $90 million in punitive damages and $30 million in compensatory damages from Goldman Sachs over its failed Abacus investment. The insurer contends that the broker-dealer sold a mortgage-backed investment that was designed to fail, causing investors to lose $1 billion.

ACA says that not only did it spend $15 million insuring Abacus, but also that the investment caused it to lose $30 million. The insurer contends that Goldman deceived it into thinking that hedge fund manager John Paulson also had invested in Abacus, when allegedly, the point of the flawed investment was so that Paulson & Co. could make huge profits by shorting the portfolio and the broker-dealer would then earn large investment banking fees.

ACA says that the Abacus 2007-AC1 collateralized debt obligation investment was already “was worthless” when Goldman marketed it to the insurer. Not only did ACA insure the underlying portfolio’s super-senior parts for $909 million, but also it purchased Abacus notes worth millions of dollars. Goldman hired ACA asset-management unit ACA Management LLC as “portfolio selection agent” to choose the securities for the Abacus deal.

Goldman has already settled for $550 million the Securities and Exchange Commission’s securities case against it over the failed collateralized-debt obligation investment. SEC had accused the federal agency the investment bank and its employee Fabrice Tourre of failing to tell investors that Paulson was involved in choosing the securities for Abacus and wanted to bet against the portfolio. Goldman has since acknowledged that it had provided incomplete marketing materials and agreed to business practice reforms.

Related Web Resources:

UPDATE: ACA Financial Sues Goldman For Alleged Abacus-Related Fraud, Wall Street Journal/Dow Jones, January 6, 2011

Goldman Sach’s $550 Million Securities Fraud Settlement Not Tied to Financial Reform Bill, Says SEC IG, Institutional Investor Blog, October 27, 2010

$1 Billion Goldman Sachs Synthetic CDO Debacle a Reminder that Even Highly Sophisticated Investors Can Be Defrauded, Stockbroker Fraud Blog, April 30, 2010

Ex-Goldman Sachs Employee Found Guilty of Stealing Code for High-Frequency Trading Activity

Published on: December 23, 2010 | by Shepherd Smith Edwards & Kantas, LLP

A New York jury has found ex-Goldman Sachs & Co. computer programmer Sergey Aleynikov guilty of one count of transportation of stolen property in interstate and foreign commerce and one count of trade-secret theft. Aleynikov is accused of stealing a specialized computer source code used in high-frequency trading activity from the investment bank.

Aleynikov, who worked for Goldman for two years, allegedly transferred “hundreds of thousands” of source-code lines and took the broker-dealer’s source code with him to Chicago, where he went to work with Teza Technologies LLC, a firm that wanted to compete with Goldman’s high-frequency trading operations. Although Aleynikov admitted to uploading parts of the investment bank’s trading codes, he told the FBI that he hadn’t intend to steal Goldman’s proprietary data.

Per the indictment, Goldman had implemented a number of precautions to protect its proprietary source code, including mandating that workers sign confidentiality agreements and requiring employees to “irrevocably assign to Goldman Sachs” the rights to any discoveries invention, ideas, concepts, or information developed while employed by the brokerage firm.

High-Frequency Trading
High-frequency trading is a trading strategy using sophisticated programs that involve the employment of algorithms that can place a series of sell and buy orders for large blocks of stock at a super fast pace while exploiting tiny price discrepancies. This type of trading has become a key source of revenue for hedge funds and investment firms on Wall Street.

In 2009, high-frequency trading was responsible for about $300 million in revenue for Goldman. This is less than 1% of the broker-dealers $45 billion in revenue.

Related Web Resources:
United States v. Aleynikov, Indictment (PDF)

Former Goldman Programmer Found Guilty of Code Theft, NY Times, December 10, 2010

Former Goldman Sachs Programmer Found Guilty After Stealing Computer Code, Security Week, December 14, 2010

Goldman Sachs, Stockbroker Fraud Blog

Goldman Sachs & Co. Clearing Unit Must Pay Unsecured Creditors of Bayou Hedge Funds $20.5M FINRA Arbitration Award, Says District Court

Published on: December 14, 2010 | by Shepherd Smith Edwards & Kantas, LLP

A district court has rejected Goldman Sachs & Co.’s (GS ) challenge to a $20.5 million securities fraud award for unsecured creditors of the failed Bayou hedge funds. The unsecured creditors are blaming the investment bank of failing to look at certain red flags and, as a result, facilitating the massive scam. The U.S. District Court for the Southern District of New York said it was sustaining the award issued by the Financial Industry Regulatory Authority arbitration panel.

The court said that contrary to Goldman’s argument, the FINRA panel “did not ‘manifestly disregard the law’ when reaching its conclusion. Also, the court noted that the panel had found that Goldman Sachs Execution and Clearing unit was not innocent of wrongdoing in that it failed to take part in a “diligent investigation” that could have uncovered the fraud.

The Bayou Hedge Funds group collapsed in 2005. According to regulators, investors lost over $450 million as a result of the false performance data and audit opinions that were issued. The Securities and Exchange Commission and the Justice Department sued the group’s founders, Daniel Marino and Samuel Israel III over the investors’ financial losses and the firm’s collapse. Both men have pleaded guilty to criminal charges and are behind bars.

The court not only disagreed with the Goldman Sachs clearing unit that the panel was not in manifest disregard of the law, but also, it found that as Goldman’s client agreements with the Bayou funds provided it with “broad discretion” over the use of securities and money in the funds’ accounts, it was not unusual for a “reasonable arbitrator” to find that Goldman’s rights in relation to the accounts provided it with “sufficient dominion and control to create transferee liability.”

Related Web Resources:

Court Rebuffs Goldman ChallengeTo $20.5M Bayou Arbitration Award, BNA, December 9, 2010

Goldman Sachs, Stockbroker Fraud Blog

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
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