British watchdog hits Goldman Sachs with huge fine

9th September 2010, Comments 0 comments

A British watchdog hit the iconic but controversial Wall Street bank Goldman Sachs with a huge fine of 17.5 million pounds in a statement on Thursday, for information failures tied to US fraud charges.

The Financial Services Authority said the fine, equivalent to 21 million euros, was for "weaknesses in controls resulting in failure to provide FSA with appropriate information". It was handed down to Goldman's London-based arm Goldman Sachs International (GSI).

The fine is one of the biggest handed out by the FSA, and is also the latest of a series of incidents to tarnish the once revered name of Goldman Sachs.

The penalty relates to Goldman's failure to disclose that it was under investigation for fraud by the US financial watchdog earlier this year, a statement said.

"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 authorised firm," said the watchdog's managing director of enforcement and financial crime, Margaret Cole.

The penalty comes after Goldman Sachs paid 550 million dollars in July to settle the fraud charges brought by the US regulator, the Securities and Exchange Commission (SEC).

The FSA had in April announced that it was launching a probe into Goldman that was linked to the charges brought by the SEC, which alleged fraud over the way the bank sold a subprime mortgage investment.

The British fine also relates to Goldman's failure to tell the British regulator that Fabrice Tourre, an executive linked to the investment product, was under investigation.

This was relevant because Tourre transferred from the United States to London, and so had to be authorised by the FSA.

"We have repeatedly stressed the importance of firms self-reporting regulatory issues to the FSA in a timely way," said Cole.

"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."

In its fraud charges, the SEC accused Goldman of allowing a prominent hedge fund -- Paulson & Co. Inc -- to put together a package of subprime mortgages that were sold to clients, but which Paulson was also betting against.

After agreeing to the settlement with the SEC, the investment bank admitted it had made a "mistake" and given "incomplete" information to clients.

Among clients of Goldman's controversial product were German commercial bank IKB and Britain's RBS.

The type of mortgage-backed securities sold by Goldman in the deal were a key contributor to the financial crisis that peaked in 2008 because many contained risky mortgages.

The trade, which took place during a massive mortgage meltdown in 2007 and as the country was about to fall into a brutal recession, was said to have cost investors around one billion dollars.

The bank has been dragged into another controversy concerning complex instruments used legally by Greece to minimise the scale of its national debt, in order to qualify to join the eurozone. Goldman Sachs provided expertise for the operation.

© 2010 AFP

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