By Grant McCool
NEW YORK, June 25 (Reuters) - U.S. financial regulators ordered a broker dealer unit of Goldman Sachs Group Inc to pay $20.5 million in a case involving the now-defunct and fraudulent Bayou hedge fund, according to an official document made public on Friday.
A Financial Industry Regulatory Authority (FINRA) dispute resolution document said creditors claimed Goldman Sachs Execution and Clearing failed to investigate the fraud and fraudulent transfers of money in what was a Ponzi scheme that unraveled in 2005.
The Ponzi scheme, in which early investors were paid with the money of new clients, was run by Bayou fund founder Samuel Israel, who is serving a 20-year prison sentence after pleading guilty in 2005 to bilking investors of $450 million.
The award of compensatory damages of $20.5 million came following arbitration during which the Wall Street firm denied the allegations, according to the FINRA document.
'We are disappointed in the award and we are considering our options,' Goldman spokesman Ed Canaday said.
According to the terms of such awards, a firm may make a motion to vacate it in federal or state courts.
Lawyers representing about 200 creditors brought the case against the unit in 2008 under U.S. bankruptcy laws.
The Wall Street firm argued in court papers that 'unlike the paradigmatic fraudulent transfer -- where a debtor gratuitously conveys assets to a relative, close friend, or other ally in order to frustrate his creditors -- the 'transferred' money was never conveyed to GSEC.
'Rather, it remained in the dominion and control of the Bayou funds all along, simply being shifted among those funds' own accounts as they directed,' the Goldman papers said.
Ross Intelisano, a lawyer for the creditors committee of Bayou, said in a statement it was the first time a clearing or prime broker was held liable for a hedge fund Ponzi scheme.
'We are very pleased that investors are getting all their money back,' Intelisano said. 'Firms like Goldman Sachs should not be allowed to stick their head in the sand when a fraud is going on.'
(Reporting by Grant McCool; editing by Andre Grenon) Keywords: GOLDMAN/BAYOU (grant.mccool@thomsonreuters.com; +1-212-393-9461; Reuters Messaging: grant.mccool.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
NEW YORK, June 25 (Reuters) - U.S. financial regulators ordered a broker dealer unit of Goldman Sachs Group Inc to pay $20.5 million in a case involving the now-defunct and fraudulent Bayou hedge fund, according to an official document made public on Friday.
A Financial Industry Regulatory Authority (FINRA) dispute resolution document said creditors claimed Goldman Sachs Execution and Clearing failed to investigate the fraud and fraudulent transfers of money in what was a Ponzi scheme that unraveled in 2005.
The Ponzi scheme, in which early investors were paid with the money of new clients, was run by Bayou fund founder Samuel Israel, who is serving a 20-year prison sentence after pleading guilty in 2005 to bilking investors of $450 million.
The award of compensatory damages of $20.5 million came following arbitration during which the Wall Street firm denied the allegations, according to the FINRA document.
'We are disappointed in the award and we are considering our options,' Goldman spokesman Ed Canaday said.
According to the terms of such awards, a firm may make a motion to vacate it in federal or state courts.
Lawyers representing about 200 creditors brought the case against the unit in 2008 under U.S. bankruptcy laws.
The Wall Street firm argued in court papers that 'unlike the paradigmatic fraudulent transfer -- where a debtor gratuitously conveys assets to a relative, close friend, or other ally in order to frustrate his creditors -- the 'transferred' money was never conveyed to GSEC.
'Rather, it remained in the dominion and control of the Bayou funds all along, simply being shifted among those funds' own accounts as they directed,' the Goldman papers said.
Ross Intelisano, a lawyer for the creditors committee of Bayou, said in a statement it was the first time a clearing or prime broker was held liable for a hedge fund Ponzi scheme.
'We are very pleased that investors are getting all their money back,' Intelisano said. 'Firms like Goldman Sachs should not be allowed to stick their head in the sand when a fraud is going on.'
(Reporting by Grant McCool; editing by Andre Grenon) Keywords: GOLDMAN/BAYOU (grant.mccool@thomsonreuters.com; +1-212-393-9461; Reuters Messaging: grant.mccool.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.