Goldman Sachs Group agreed to pay $2 million to settle accusations that it failed to detect customers' illegal short sales of stock in companies just before those companies completed public offerings, U.S and industry regulators said on Wednesday.
The Securities and Exchange Commission and NYSE Regulation, which oversees trading on the New York Stock Exchange, said they both settled enforcement actions against the company's Goldman Sachs Execution and Clearing LP unit.
The SEC and NYSE said the unit violated regulations that require brokers to accurately mark sales, either long or short, and to restrict stock loans on long sales. The settlement involves a series of trades between March 2000 and May 2002.
"If Goldman had instituted and maintained appropriate procedures, it could have discovered through its own records the customers' illegal activity," the SEC said in a statement.
Goldman agreed to the settlement without admitting or denying any wrongdoing and it declined to comment.
The SEC said it had previously brought a settled civil injunction action against two of Goldman's customers who it said had engaged in illegal short sales and who agreed to pay more than $1 million to settle.
Goldman Sachs Execution was originally a part of Speer, Leeds & Kellogg, a trading firm acquired by Goldman in October 2000. Regulators in January 2005 enacted rules governing short sales, holding brokers responsible for ensuring trading customers properly flagged long and short sales.
The regulators alleged that Goldman customers carried out the illegal short-selling scheme by placing sell orders through the firm's automated trading platform, REDI System, and falsely marking them "long."
Because the customers had sold the securities short and did not have the securities at settlement date, Goldman delivered shares to brokers so that purchasers could settle the customers' purported "long" sales, the regulators said.
"Direct access does not obviate a broker's own responsibilities under the commission's short sale rules, and it certainly does not allow a broker to ignore apparent discrepancies indicating illegal trading by its customers," said Linda Thomsen, the SEC's enforcement division director.
The NYSE, in its decision, also found Goldman failed to reasonably supervise its business activities in the matter. The regulators noted Goldman has already taken steps to make its systems compliant.