Goldman agrees to pay fine over claims it broke short selling rules
By Stephen Foley in New York
Wednesday, 5 May 2010
Goldman Sachs has been fined over allegations that it broke the short selling rules introduced to protect financial firms at the height of the market panic in 2008.
The bank agreed to pay $450,000 without admitting wrongdoing, after the New York Stock Exchange and the Securities & Exchange Commission said its traders broke short selling rules on 385 separate occasions.
The SEC imposed rules to prevent so-called "naked" short selling. A short sale is when a trader borrows stock to sell, in the expectation that they can pick it up cheaper later in time to return it, thus pocketing a profit. A naked short sale is when the seller doesn't even bother to borrow the stock, and regulators worried in 2008 that this was contributing to the downward pressure on financial company share prices, as well as causing dangerous administrative problems.
Goldman's trade execution and clearing business made failures of supervision and compliance with the rules between September 2008 and January the following year, the regulators allege.
The case comes on top of Goldman's escalating legal difficulties related to its mortgage derivatives business, where it faces an accumulating number of lawsuits from shareholders angry at the bank's activities in the run-up to the credit crisis and claiming they were kept in the dark about a fraud investigation.
Regardless of whether Goldman settles or is found guilty of fraud in the complex subprime mortgage deal over which it was charged by the SEC last month, it must now also defend itself against accusations that it should have told investors last summer that it had received a Well's notice from the regulator. A Well's notice is a formal warning that civil charges are likely.
Goldman says it had not considered the notice to be material information, and hadn't expected to be charged. It denies the SEC's allegations.
