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December 10, 2012

LITIGATION AND ENFORCEMENT

ENFORCEMENT-CFTC Fines Goldman Sachs $1.5M for Supervision Failures Related to Fabricated Trades

By Lene Powell, J.D.

The CFTC ordered Goldman, Sachs & Co., a registered futures commission merchant (FCM), to pay a $1.5 million civil monetary penalty to settle CFTC charges that it failed to diligently supervise its employees for several months in late 2007. The CFTC order also requires Goldman to cease and desist from violating a CFTC regulation requiring diligent supervision.

According to the order, Goldman failed for several months to ensure that certain aspects of its risk management, compliance, and supervision programs complied with its obligations to diligent supervise its business as a Commission registrant. During November and December 2007, Goldman failed to diligently supervise the trading activities of an associated person and former Goldman trader, Matthew Marshall Taylor.

In particular, in violation of Commission Regulation 166.3, Goldman lacked procedures to prevent the manual entry of fabricated futures trades into its front office systems, which aggregated manually entered and electronically executed trades in the same product. As a result, on approximately 60 occasions over seven trading days in November and December 2007, Taylor was able to enter fabricated e-mini S&P 500 sell trades into its manual trading system. The fabricated sell trades artificially offset and thereby camouflaged e-mini S&P 500 buy trades Taylor had executed in the market. Taylor was able to amass an $8.3 billion e-mini S&P 500 position in a Goldman trading account on December 13, 2007, and admitted the loss at the end of the trading day.

Goldman ultimately suffered a loss of over $118 million in unwinding the position. Because Taylor was trading for a firm account, there were no customer losses.

The order further states that after Taylor was discharged, although Goldman made regulatory filings with the National Futures Association (NFA) and FINRA, Goldman provided additional important information only to FINRA. Goldman failed to alert the NFA or CFTC that Taylor attempted to conceal his trading via fabricated trades until after the CFTC's Division of Enforcement commenced the investigation leading to the settlement.

Goldman stated in its settlement offer that it has made changes including implementing written enhancements to its U.S. futures-related trading and risk management controls and supervision policies and procedures. The firm has also undertaken to implement a written procedure to enhance its provision of information to the NFA and the Commission about misconduct or alleged misconduct of terminated Goldman employees that relates to trading on a Commission-regulated market to ensure that termination notifications of associated persons, including follow-up disclosures, are provided to the NFA and the Commission.

In a related action, the CFTC filed an enforcement action on November 8, 2012 in the Federal District Court for the Southern District of New York, charging Taylor with defrauding Goldman by intentionally concealing from Goldman the true size, as well as the risk and potential profits or losses associated with the S&P e-mini futures contracts positions traded by Taylor in the Goldman account.

The case is CFTC Docket No 13-08.

CommodityFutures Derivatives Enforcement

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