NEW YORK (
may face charges from the Commodity Futures Trading Commission (CFTC) related to how one of its customers handled client money, according to filing with the
Securities and Exchange Commission
The focus of the CFTC investigation is Goldman Sachs Execution & Clearing (GSEC), which provides clearing and trade execution services for a wide range of Goldman clients, including hedge funds, companies, mutual funds and central banks.
One of those clients, a broker-dealer registered with the SEC maintained accounts at Goldman that "were actually accounts belonging to customers of the broker-dealer client and not the client's proprietary accounts," according to Goldman's characterization of the CFTC's allegations.
Goldman "knew or should have known," about this discrepancy and may now face "aiding and abetting, civil fraud and supervision-related charges," according to the allegations of the CFTC staff, which will recommend charges be brought, the Goldman filing states.
A CFTC spokesman declined to comment and a Goldman spokesman declined to elaborate on the filing.
The investigation marks a major shift at the CFTC, which has expanded authority and an apparent new sense of purpose under Chairman Gary Gensler, a former Goldman Sachs executive appointed by President Obama.
"It has been very rare that the (CFTC) enforcement division has gone after such a big financial institution. My observation was in the prior administration a lot of enforcement actions were brought, but they were brought against mom and pop types of futures institutions and that there were very few actions brought against institutions in the futures market that are household names," says Michael Greenberger, former director of trading and markets at the CFTC and a law professor at the University of Maryland.
Under the Commodity Exchange Act of 1936 broker-dealers
or their rough equivalent in the futures markets, futures commission merchants (FCMs) have an obligation to segregate accounts of customers so if a bankruptcy occurs the assets of the bankrupt company can be identified as easily as possible, Greenberger says, adding that the Dodd Frank Act may expand the segregation requirement beyond the regulated futures market to include the much larger market for derivatives as a whole.
"It sounds like when they're saying Goldman aided and abetted that they helped a broker dealer or FCM mask what should have been a customer's account and disguise it as a proprietary account," Greenberg says. Greenberg adds that the Dodd-Frank Act attempts to expand
It is also possible that the unnamed broker-dealer client was itself a Goldman affiliate, according to John Coffee, securities law professor at Columbia University. Coffee acknowledged that possibility is "merely a guess," though if Goldman was the clearing broker for a Goldman affiliate in this instance, it "would suggest that there is a parallel SEC investigation," Coffee wrote in an email exchange.
An SEC spokesman declined to comment.
It is not illegal to clear for an affiliated firm, according to Coffee, who adds "Goldman is not known as a clearing specialist (as for example Bear Stearns was known). It thus might be more likely to clear for an affiliate."
However, Coffee offers that other potential clients include Lehman Brothers--an intriguing possibility, given the bankruptcy-related issues raised by Greenberger.
Regardless, Coffee wrote, Goldman's disclosure is "a sign of poor oversight and brokers who were out of control."
Goldman, which settled separate charges with the SEC last year for $350 million, is also subject to a wide range of other regulatory investigations and reviews, it disclosed in its quarterly filing.
Among these is one announced last month by the European Commission related to the anti-competitive practices in the credit default swaps market. The U.S. Department of Justice is conducting a similar investigation, according to Goldman's filing. Other investigations, including one looking at Goldman's role in the financial crisis and another on potential anti-competitive issue in municipal securities markets, are also ongoing, according to the filing.
Also disclosed in the filing was additional detail on Goldman's trading profitability. Goldman traders posted net revenues of greater than $100 million on 32 days during the quarter, the filing states.
Goldman's performance is its best since the first quarter of a year ago, when it lost money on zero days, according to
notes, however, that Goldman's performance was inferior to that of
Bank of America
, neither of which had a single day of losses during the first quarter.
Written by Dan Freed in New York
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.