After Settled SEC Suit, Goldman Battles $27 Million CDO Probe by British Regulators

(September 9, 2010) — The Financial Services Authority (FSA) has fined Goldman Sachs £17.5 million ($27 million) for failing to reveal the Securities and Exchange Commission’s (SEC) probe into the synthetic collateralized debt obligation known as Abacus. The fine against the bank is the second-largest ever levied by the FSA, ranking behind the £33.3 million fine in June against JPMorgan Chase & Co for not properly segregating client money from the firm’s accounts.

According to the British securities regulator, London-based unit Goldman Sachs International breached FSA principles by failing to ensure it had in place adequate systems and controls to enable it to comply with its UK regulatory reporting obligations. Pension funds were often the purchasers of faulty CDOs, resulting in a trend of pension funds suing financial institutions since the economic crisis. In early January, for example, a Virgin Islands pension fund sued Morgan Stanley over CDO sales, claiming the Wall Street bank marketed risky mortgage-related notes that it believed would fail.

In July, the firm settled its suit with the SEC after agreeing to pay $550 million — the largest penalty against a Wall Street firm in the SEC’s history — over allegations of fraud tied to Abacus 2007-AC1, a credit derivative product based on mortgage-backed securities. The US regulator’s charges motivated Britain’s regulator to delve into whether the bank should have been more transparent with the investigation earlier.

The SEC’s suit against Goldman Sachs also centers around Fabrice Tourre, the 31-year-old Goldman vice president who was the only individual sued by the SEC. The complaint by the SEC alleges Tourre was responsible for creating Abacus with help from Paulson & Co. Tourre, who called himself “The Fabulous Fab,” allegedly sent an email to a friend on January 23, 2007 warning about the upcoming collapse in the subprime mortgage securities market. While the US bank reached a settlement with the SEC in July, Fabrice Tourre ‘s personal case with the SEC is ongoing. Tourre is prepared to fight the regulator.

“We have repeatedly stressed the importance of firms self-reporting regulatory issues to the FSA in a timely way,” Margaret Cole, FSA’s managing director of enforcement and financial crime, said in a statement. “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 authorized firm,” adding that the fact senior executives at Goldman’s London-based unit knew about Tourre’s Wells Notice, but did not consider the obvious regulatory implications for GSI is very disappointing.

“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,” Cole stated.