U.K. regulator fines Goldman over SEC investigation

The Financial Services Authority (FSA) has today fined London-based firm Goldman Sachs International (GSI) £17.5 million for breaching FSA Principles. The fine relates to GSI’s failure to ensure that it had in place adequate systems and controls to enable it to comply with its UK regulatory reporting obligations. This resulted in a failure to notify the FSA of matters relating to the United States Securities and Exchange Commission (SEC) investigation into the Abacus 2007-AC1 synthetic collateralised debt obligation (Abacus).

The Abacus product was structured by GSI’s US affiliate, Goldman Sachs & Co. (GSC), and marketed (in part) by GSI from the UK to institutional investors. Fabrice Tourre was, while at GSC, part of the team that structured Abacus. Later, Mr Tourre transferred to GSI in London and became an FSA approved person in November 2008.

GSI is part of the worldwide Goldman Sachs Group. As an FSA authorised firm, GSI has obligations to disclose relevant information to the FSA. GSI’s systems for compliance with those obligations were inadequate to ensure that other group members would bring to its attention relevant matters which might have an impact on GSI in the UK.

Specifically, in August 2008, the SEC began making enquiries of GSC regarding Abacus. Over the next year the SEC obtained documents and witness evidence about Abacus from GSC and from GSI London-based personnel. Despite the involvement of GSI in the marketing of Abacus and the involvement of UK approved people in the SEC investigation, no one at GSC or GSI considered the potential regulatory implications of the SEC investigation for GSI.

In breach of FSA Principles 2 and 3, GSI did not have effective systems and controls in place to ensure that relevant information about the SEC investigation was shared between GSC and the people within GSI who needed to know about it. In particular, GSI did not have effective procedures in place to ensure that its compliance department was made aware of the SEC investigation so that it could consider whether any notifications needed to be made to the FSA in compliance with GSI’s regulatory reporting obligations.

Following its investigation, the SEC issued Wells Notices* to GSC and Fabrice Tourre containing allegations of serious violations of US securities law relating to Abacus. In breach of FSA Principle 11, GSI did not tell the FSA that a Wells Notice had been issued to Mr Tourre in September 2009, although several senior managers at GSI were aware of the fact. As a consequence of GSI’s failure to notify, Mr Tourre remained approved in the UK and able to perform a controlled function for several months without further enquiry or challenge from the FSA.

GSI’s compliance department only became aware of the SEC investigation when, on 16 April 2010, the SEC announced that it had commenced enforcement proceedings in the US courts against GSC and Mr Tourre alleging that they had committed serious violations of US securities law by making misleading statements and omissions in connection with the Abacus transaction. On 15 July 2010, the SEC announced that it had reached a US$550 million settlement with GSC in relation to Abacus. Mr Tourre denies the allegations against him.

Margaret Cole, managing director of enforcement and financial crime, said:

"We have repeatedly stressed the importance of firms self-reporting regulatory issues to the FSA in a timely way. 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. The fact that senior business people at GSI in London knew about Mr Tourre’s Wells Notice, but did not consider the obvious regulatory implications for GSI is very disappointing. Had GSI complied with its UK obligations, the outcome for it would have been very different.

"This penalty should send a message – particularly to the senior management of large institutions – of the need to have their firm’s UK reporting obligations at the forefront of their minds."

The FSA investigation found that GSI did not deliberately withhold any information from the FSA. GSI co-operated fully and agreed to settle at an early stage. In doing so it qualified for a 30% discount. Without the discount the fine would have been £25 million.

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