Goldman Sachs just cannot get a break in its battle with Bayou Group. After losing an arbitration that resulted in a $20.6 award to the hedge fund, Goldman asked a federal judge to throw out the award. U.S. District Judge Jed Rakoff declined.
Bayou is now defunct, but its unsecured creditors are alive and kicking. The judge granted their request to confirm the award made by the Financial Industry Regulatory Authority last June. The creditors claimed the Goldman’s clearing unit ignored obvious signs of the $450 million fraud perpetrated by former Bayou head Samuel Israel, who was sentenced in 2005 to 20 years in the big house.
“It’s significant,” said Ross Intelisano, a partner at Rich & Intelisano LLP, representing the creditors. “It confirms the largest arbitration award ever rendered against Goldman, and provides a significant recovery for investors.” Goldman spokesman Ed Canaday declined to comment.
It was not immediately clear whether Goldman plans an appeal. As is customary, the arbitrators did not provide reasons for their decision. According to a spokesperson for FINRA, appeals of arbitrators’ decisions are rare. Judge Rakoff said he will issue an opinion to explain his reasons for upholding the award. If the award stands, it could increase the requirements that Wall Street banks set before clearing trades for clients.
In court papers, Goldman called the legal foundation for the arbitration award “demonstrably wrong.” Goldman said the law is “crystal clear” that it cannot be liable for money that Bayou deposited into and shuffled among accounts at the bank.
The Securities Industry and Financial Markets Association filed an amicus brief in support of Goldman. The brief provided an overview of the current regulatory context and argued that clearing brokers have no obligation to monitor the accounts of investors whose transactions they clear. The Association said that clearing houses have only a “backend” or record-keeping role in investment transactions and that they are not set up carry out a monitoring function. Forcing clearing houses to monitor for “red flags” would come at considerable expense and change the way Wall Street does business, it added.
Every year, thousands of investors and firms take their disputes to arbitration. The process is overseen by FINRA and is often triggered by a mandatory arbitration in contracts between banks and investors.