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UK’s FSA fines Goldman Sachs $27m for failing to report U.S. probe

Friday, September 10, 2010
Opalesque Industry Update – For failing to report to UK financial authorities that it was being investigated in the U.S. for possible fraud, Wall Street banking giant Goldman Sachs was fined $27m (£17.5m) by the Financial Services Authority.

Although the fine is not significant considering the size of Goldman, the amount is one of the biggest handed out by the FSA for the bank’s alleged “weaknesses in controls resulting in failure to provide FSA with appropriate information,” reported India Times.

A spokesperson for the bank commented it was “pleased the matter is resolved.

Margaret Cole, the FSA’s director of enforcement and financial crime put the matter into perspective explaining, “GSI did not set out to hide anything, but its defective systems and controls meant that the level and quality of its communications with the FSA fell far below what we expect of an authorised firm.”

Records of the case showed that the FSA only learned that its U.S. counterpart, the Securities and Exchange Commission SEC, was investigating Goldman Sachs over its controversial Abacus transaction when the American regulator went public on April 16, 2010 said the Guardian.

This discrepancy on Goldman’s part was in violation of FSA’s principle 11 which requires all firms to transact with regulators in an “open and cooperative way” and obliges them to disclose to the watchdog anything “of which the FSA would reasonably expect notice.” The FSA considers this particular rule a sacred one but rarely catches a big fish under the said principle.

Offshoot of $550m settlement in U.S.
Indeed the fresh fine imposed against Goldman Sachs was an offshoot of the $550m settlement it sealed with the SEC in July over the way it marketed a collateralized debt obligation (CDO) product known as Abacus.

The SEC filed fraud charges against Goldman Sachs and one of its employees, Fabrice Tourre, with securities fraud in April for reportedly making material misstatements and omissions in the marketing of synthetic CDO product ABACIS 2-007-AC1, which was also linked to the subprime mortgage crisis that hit the U.S. housing market in 2007.

The SEC alleged that the bank failed to inform its investors that hedge fund Paulson & Co. Inc., was shorting the portfolio and earned some $1bn from the transaction.

GSI spokeswoman Fionna Laffan confirmed that the bank was happy with the resolution of the case with the FSA and told Bloomberg that Tourre “remains an employee on paid leave.”

Aside from the $550m settlement comprised of $535m in fines and $15m in restitution of fees it collected, U.S. District Judge Barbara Jones in Manhattan also ordered Goldman to pay $300m to the government and $250m to be set aside to compensate two European banks that lost money on their investments.

The European banks, German IKB Deutsche Industriebank and UK-owned Royal Bank of Scotland (RBS), reacted differently from the decision. IKB Deutsche Industriebank will get $150m out of the $550m Goldman agreed to pay, representing the whole amount IKB lost in the CDOs.

Meanwhile ,RBS will receive $100m from the settlement deal, and said it would "carefully consider all of its options" and try to squeeze out more money from Goldman. RBS lost $841m on the subprime product.
- Precy Dumlao
PD

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