October 17, 2011

Bloomberg: Goldman Sachs Asks Court to Throw Out $20.5 Million Bayou Creditors’ Award

Below is a Bloomberg article about our firm's $20.6 million FINRA arbitration award against Goldman Sachs related to Bayou. It's the largest arbitration award ever rendered against Goldman. The award was confirmed by Judge Rakoff and Goldman filed it's brief to the Second Circuit.

Goldman Sachs Asks Court to Throw Out $20.5 Million Bayou Creditors’ Award
By Bob Van Voris - Oct 15, 2011

Goldman Sachs Group Inc. (GS) filed an appeal seeking to dismiss a $20.5 million arbitration award to creditors of the failed hedge fund firm Bayou Group LLC.

Goldman Sachs asked the U.S. Court of Appeals in Manhattan to overrule a decision by the Financial Industry Regulatory Authority, the independent regulatory group for the securities industry. A federal district judge declined in November 2010 to reverse the Finra award.

The creditors sued Goldman Sachs Execution and Clearing LP in 2008 for its role as the prime broker and clearing broker for Bayou’s hedge funds. They said the Goldman Sachs unit aided a $400 million fraud at Stamford, Connecticut-based Bayou, which filed for bankruptcy in May 2006. Bayou co-founder Samuel Israel pleaded guilty to directing the scheme and is serving a 22-year prison term.

In the November ruling, U.S. District Judge Jed Rakoff in Manhattan said Goldman Sachs failed to show that the arbitration panel had “manifestly disregarded the law” in granting the award.

Goldman Sachs, based in New York, argued in its appeal brief that the Finra panel was wrong in determining that deposits into Bayou’s accounts and internal bookkeeping entries qualified as fraudulent transfers.

John Rich, a lawyer for the Bayou creditors, didn’t immediately return a voice-mail message seeking comment yesterday on the Goldman Sachs filing.
Fellow Inmate

Israel is incarcerated at the same federal prison complex in Butner, North Carolina, as Bernard Madoff, who is serving a 150-year sentence for orchestrating the biggest Ponzi scheme in history.

In addition to a 20-year term for the fraud, Israel’s term was extended by two years after he attempted to make it appear that he had committed suicide by jumping off a bridge on the day he was to report to prison.

The case is Goldman Sachs Execution & Clearing LP v. Official Unsecured Creditors’ Committee of Bayou Group LLC, 10- cv-05622, U.S. District Court, Southern District of New York (Manhattan).

October 14, 2011

WSJ: Goldman Continues to Fight $20.5 Million Award in Pivotal Case

Below is a WSJ article about our firm's $20.6 million FINRA arbitration award against Goldman Sachs related to the Bayou hedge fund fraud. It is the largest arbitration award ever rendered against Goldman. The award was confirmed by Judge Rakoff of the SDNY in November 2010 and Goldman filed it's brief to the Second Circuit this week.

Goldman Continues to Fight $20.5 Million Award in Pivotal Case
By LIZ MOYER

NEW YORK—Goldman Sachs Group Inc. is continuing to fight a $20.5 million arbitration award that, while relatively small from the big bank's perspective, has broader implications for Wall Street.

The award stems from Goldman's role as a clearing broker for a failed hedge fund. Goldman filed an appeal Thursday in the U.S. Court of Appeals in the Second Circuit, arguing as it did last fall in district court that the Financial Industry Regulatory Authority arbitration panel that awarded the sum ignored the law.

On the opposite side are the creditors of Bayou Group LLC, which accused Goldman Sachs Execution & Clearing LP of ignoring signs of fraud at the hedge fund run by Samuel Israel III before it imploded in 2005.

A Finra panel awarded the Bayou creditors $20.5 million in June 2010. Goldman sued to vacate the arbitration award in July 2010, but Federal Judge Jed Rakoff confirmed the award in November.

Ross Intelisano, a lawyer for the Bayou creditors at Rich, Intelisano & Katz, said investors are "frustrated" by the delay in receiving their money. "We're looking forward to the Second Circuit reconfirming the arbitration award," he said.

The disputed case comes as regulators are eager to lay blame after the financial crisis exposed rampant cases of Ponzi schemes and other frauds. The $20.5 million award, if it is upheld, could raise the standards of care required by banks that clear trades for hedge funds, lawyers said.

The Securities Industry and Financial Markets Association, an industry group representing Wall Street sided with Goldman in district court last year and plans to file a brief in support of Goldman in the appeal, a spokesman said.

In May, Goldman said the Commodity Futures Trading Commission had "orally advised" it that it faced civil fraud charges over its role clearing trades for an unnamed client. Goldman said it was cooperating.

In that probe, the potential charges concern whether Goldman knew or should have known the client was using customer accounts in transactions with Goldman rather than the client's own accounts.

In the Bayou case, the creditors argued that the hedge fund's depositing of money into its account at Goldman, and then its shuffling around of that money among accounts, constituted transfers to Goldman that could be recovered by investors.

The creditors also accused Goldman of ignoring several warning signs, including suspicious money transfers. About $13.9 million of the award concerns money Bayou moved among its accounts.

Bayou was founded in 1996 and exposed as a $400 million fraud in 2005. Goldman was a prime broker and clearing firm for Bayou from 1999 to 2005. Mr. Israel, who went on the lam briefly, is currently serving a 22-year prison sentence.

Dan Carlson, a San Diego lawyer who represents investors in Finra arbitrations, said the financial crisis has "opened eyes that clearing firms and brokerages need to be doing more due diligence."

Wall Street firms have argued that extra due diligence will slow down business and increase costs. "In imposing liability on Goldman, the arbitrators disregarded the long-recognized principle that a clearing firm cannot be liable for merely processing transactions received from an authorized source," Sifma wrote in its friend of the court brief siding with Goldman in district court last fall.

"If clearing firms were required to analyze trading in introduced accounts," Sifma added, "the speed and efficiency demanded in the contemporary securities markets would not be possible."

December 3, 2010

NY Times: Goldman's $20 Million Consequence

Below is a New York Times piece about the Firm's $20.6 million arbitration award against Goldman Sachs being upheld by Judge Rakoff in a sternly written opinion.

DealBook - A Financial News Service of The New York Times
November 30, 2010, 6:16 pm
Goldman's $20 Million Consequence
By SUSANNE CRAIG

Goldman Sachs made its bed. Now Judge Jed S. Rakoff says the Wall Street firm has got to lie in it.

In 2008, Goldman chose to fight a case in arbitration rather than court. On Tuesday, in a sharply worded attack on the system, Judge Rakoff of the United States District Court in Manhattan said that Goldman would have to live with the findings of the arbitration panel. In this instance, those consequences could amount more than $20 million.

"Although arbitration is touted as a quick and cheap alternative to litigation, experience suggests that it can be slow and expensive. But it does have these `advantages'; unlike courts, arbitrators do not have to give reasons for their decisions, and their decisions are essentially unappealable." Judge Rakoff wrote in his opinion. Goldman "having voluntarily chosen to avail itself of this wondrous alternative to the rule of reason, must suffer the consequences."

The case stems from the collapse of the Bayou Group, whose former chief executive, Samuel Israel III, is now serving 20 years for fraud. Goldman cleared trades for the hedge fund for years. In 2008, unsecured creditors of Connecticut-based Bayou filed a claim against Goldman, arguing the firm ignored signs of wrongdoing at Bayou.

Under the terms of its contract with Bayou, Goldman could have applied to fight the case in bankruptcy court. But instead the firm opted for arbitration.

"Both sides could theoretically have agreed to waive the arbitration clause and litigate in court, but either could have insisted on arbitration," says a Goldman spokesman, who declined to comment on the decision.

That strategy didn't pan out. Earlier this year, a three-person Financial Industry Regulatory Authority panel ordered the firm to pay $20.6 million to the unsecured creditors of the Bayou Group.

But Goldman wasn't happy with the findings, and in July it moved to vacate the arbitration award - the largest ever levied against the firm. In taking the matter to court, the firm argued the panel had "manifestly disregarded the law" and exceeded its authority under the Federal Arbitration Act.

In early November, Judge Rakoff denied the request. On Tuesday, he expounded on the matter in a 13-page opinion, taking jabs at both arbitration and Goldman. Judge Rakoff, known for his sharp wit and blunt talk in big Wall Street cases wrote, "a court, unlike an arbitrator, must state its reasons and subject them to appellate scrutiny."

The firm is not out of options yet. It can appeal Judge Rakoff's decision to the Second Circuit Court of Appeals.

If ultimately upheld, the Bayou award could have ramifications across the financial sector. Wall Street firms, which handle billions of dollars in transactions, say that their job is to clear trades, not police clients. This award could raise the standard for clearing businesses.

John G. Rich, a partner at New York law firm Rich & Intelisano who represented the Bayou creditors, said, "The Bayou investors are gratified that the judge gave proper deference to the arbitrators' findings about Goldman's conduct."

November 9, 2010

The American Lawyer: Judge Rakoff Confirms $20.6 Million Arbitration Award Against Goldman Sachs

Below is a piece by the American Lawyer. Top Story of the day.

TOP STORY November 9, 2010

The Am Law Litigation Daily - Did Goldman Make Bad Gamble With Arbitration Award?

Arbitration / Commercial
Judge Rakoff Confirms $20.6 Million Arbitration Award Against Goldman Sachs
Goldman Sachs isn't known for tactical blunders. Did the banking giant miscalculate by challenging a $20.6 million arbitration award?

That's the question we were left pondering after Manhattan federal district court judge Jed Rakoff confirmed the award, which had been issued by a Financial Industry Regulatory Authority panel in June. (Judge Rakoff's one-page order is here; the judge will issue a more detailed opinion later.) The award was won by the creditors' committee of the Bayou Group, which collapsed in 2005 under the cloud of a $400 million Ponzi scheme orchestrated by its former CEO, Samuel Israel III. In their arbitration claim, Bayou's creditors argued that Goldman, which cleared trades for Bayou, failed to investigate these trades after it learned of potential fraud. Goldman responded that it had no obligation as a prime or clearing broker to detect or report fraud.

The FINRA panel's decision in June got lots of folks on Wall Street gnashing their teeth. The clearing business moves a lot of money and generates plenty of profits for firms like Goldman, and brokers worried that the Bayou award could force them into a policing role and compel them to raise due diligence standards.

Goldman and its lawyers at Shulte, Roth & Zabel filed a lawsuit to vacate the FINRA award in July, arguing that the FINRA panel exceeded its powers "in manifest disregard of the law." The bank got amicus support from the Securities Industry and Financial Markets Association, which asserted that requiring clearing firms to monitor every trade for potential fraud would cripple securities markets. Sidley Austin's Henry Minerop, who authored SIFMA's brief, declined to comment pending an elaborated opinion from Judge Rakoff.

The Bayou creditors' committee, represented by Rich & Intelisano, argued at a September hearing before Judge Rakoff that the FINRA decision was limited to cases in which clearing firms had been notified of a Ponzi-style fraud.

Goldman will hardly miss $20 million. The problem is that while the FINRA decision may have rankled clearing firms, it was not precedential. Depending on the reasoning in Judge Rakoff's more detailed ruling, other clearing firms may wish that Goldman had chosen to write the Bayou creditors a $20.6 million check.

"We've been fighting for a long period of time, and we look forward to the investors getting some of their money back," Ross Intelisano told us. Goldman’s lead lawyer, Shulte Roth’s Howard Schiffman, referred us to his client, which declined to comment.

-- David Bario

November 9, 2010

Reuters: Goldman loses bid to toss record Bayou award

Here is a piece from Reuters on the Firm's recent win against Goldman Sachs.

Goldman loses bid to toss record Bayou award
3:46am EST

By Jonathan Stempel

NEW YORK (Reuters) - A federal judge on Monday rejected Goldman Sachs Group Inc's bid to throw out a record $20.6 million (12.8 million pounds) arbitration award involving the now-defunct Bayou hedge fund.

U.S. District Judge Jed Rakoff in Manhattan granted a request by unsecured creditors of Bayou Group LLC to confirm the award, which was made in June by an arbitration panel of the Financial Industry Regulatory Authority.

Creditors had accused a Goldman (GS.N: Quote, Profile, Research, Stock Buzz) unit that cleared trades for Bayou of ignoring signs of fraud at the Connecticut hedge fund.

Bayou was run by Samuel Israel, who is serving a 20-year prison sentence after pleading guilty in 2005 to defrauding investors out of roughly $450 million.

"It's significant," said Ross Intelisano, a partner at Rich & Intelisano LLP, representing the creditors. "It confirms the largest arbitration award ever rendered against Goldman, and provides a significant recovery for investors."

Goldman spokesman Ed Canaday declined to comment. It was not immediately clear whether Goldman plans an appeal.

Rakoff said he will issue a opinion to explain his reasons for upholding the award.

If the award stands, it could increase the requirements that Wall Street banks set before clearing trades for clients.

In court papers, Goldman called the legal foundation for the arbitration award "demonstrably wrong."

Goldman said the law is "crystal clear" that it cannot be liable for money that Bayou deposited into and shuffled among accounts at the bank.

The case is Goldman Sachs Execution & Clearing LP v. Official Unsecured Creditors' Committee of Bayou Group LLC, U.S. District Court, Southern District of New York, No. 10-05622.

(Reporting by Jonathan Stempel. Editing by Robert MacMillan)

November 8, 2010

NY Times: Judge Upholds Award Against Goldman

Below is a piece from the NY Times' DealBook about Judge Rakoff confirming the $20.6 million arbitration award against Goldman Sachs, the largest arbitration award ever rendered against the firm.

DealBook - A Financial News Service of The New York Times
November 8, 2010, 11:29 am
Judge Upholds Award Against Goldman

A federal judge has denied a request by Goldman Sachs to throw out a record arbitration award levied against the Wall Street firm earlier this year.

Goldman was ordered in June to pay $20.6 million to the unsecured creditors of the Bayou Group, a hedge fund manager, who accused Goldman of ignoring signs of fraud at the firm.

Bayou collapsed in 2005, and the firm’s former chief executive, Samuel Israel III, is serving 20 years for fraud. He pleaded guilty to misrepresenting the value of Bayou’s funds and defrauding clients of more than $400 million.

Goldman cleared trades for Bayou, which was based in Connecticut, before it collapsed. In 2008, Bayou’s unsecured creditors’ committee filed an arbitration claim against Goldman.

Judge Jed S. Rakoff of United States District Court in Lower Manhattan issued an order on Monday, saying a petition by Goldman to vacate the award had been denied.

“After full consideration of the parties’ briefs and oral argument, the court hereby denies the petition to vacate the arbitration award and grants the cross-petition to confirm the award,” he wrote. “However final judgment will not be entered in this case until the court issues an opinion setting forth the reasons for this ruling.”

In July, Goldman moved to vacate the award. During the arbitration, Goldman denied accusations that it had ignored signs of wrongdoing, and it still has more avenues to appeal the award.

A Goldman spokesman declined to comment on Judge Rakoff’s order.

The award was a watershed. If ultimately upheld, it could have ramifications throughout the financial sector. Wall Street firms, which handle billions of dollars in trades, say that their job is to clear the trade, not police the clients. This award could raise the standard for clearing.

“We are looking forward to investors finally getting some of their money back from this tragic fraud,” said Ross Intelisano, a partner at the New York law firm Rich & Intelisano who represented the Bayou creditors.

– Susanne Craig

October 22, 2010

NY Times: In Clearing Bayou, Quagmire for Goldman

Below is a piece from the front page of the October 23, 2010 business section of the New York Times regarding the firm's $20.6 million arbitration award against Goldman Sachs, the largest customer arbitration ever rendered against Goldman.

DealBook - A Financial News Service of The New York Times
October 21, 2010, 8:38 pm
In Clearing Bayou, Quagmire for Goldman

By SUSANNE CRAIG

“Did Sam Israel come to the dinner? Has Bayou ramped it up yet?” asked a top Goldman Sachs executive in a 2004 e-mail.

The executive, Duncan L. Niederauer, now head of the New York Stock Exchange, was writing to make sure that Goldman would keep the business of Samuel Israel III, whose hedge fund, the Bayou Group, was paying the firm often millions of dollars in fees a year to clear its trades.

The next year, Bayou collapsed amid fraud investigations. Mr. Israel would later be convicted of defrauding investors of hundreds of millions of dollars and was sentenced to 22 years in prison.

Bayou’s unsecured creditors filed an arbitration contending that Goldman knew for several years that the Connecticut hedge fund was hemorrhaging money even when it was claiming impressive returns.

Now, newly unsealed court documents — including Goldman e-mail and internal reports — portray a firm that at times seemed to turn a blind eye to its own internal concerns about Bayou as it raked in fees from the hedge fund.

During the arbitration, Goldman denied allegations it had ignored signs of wrongdoing. “We have asked the court to review the arbitration panel’s decision and believe it is inappropriate to comment.”

Through a spokesman, Mr. Niederauer declined to comment.

The documents — providing a rare window into a Wall Street firm’s clearing of a hedge fund client — have come to light as a result of litigation involving the unsecured creditors, who have accused Goldman of ignoring signs that the hedge fund was a Ponzi scheme.

In July, Goldman moved to vacate the decision ordering it to pay $20.6 million, the largest investor arbitration award ever levied against the Wall Street firm.

The award was a watershed. If the federal courts uphold the arbitration decision, it could have ramifications across Wall Street. Wall Street firms, which handled billions of dollars in trades, say that their job is to clear the trade, not police the clients.

If the Bayou arbitration award is upheld, Wall Street’s main lobby group, the Securities Industry and Financial Markets Association, has argued it could paralyze trading.

Goldman has its work cut out for it in its move to have the award thrown out. Arbitration awards are rarely overturned by courts and can be vacated only on a handful of grounds: for bias, fraud or if courts find there was “manifest disregard” of the law in the arbitration process.

The award and the unsealed documents could complicate the industry’s position. They show Goldman’s clearing division had at times serious concerns about Bayou, yet failed to alert securities regulators, raising fresh questions about what the obligations of a clearing firm should be.

“Do we care if the Bayou ‘Bayou No Leverage Fund’ uses leverage?” asked a Goldman Sachs executive, Charles Sweeney, in a December 2003 e-mail to two colleagues. Mr. Sweeney, through the Goldman spokesman, declined to comment. A Goldman spokesman said that Bayou’s new account form allowed it to use margin.

Bayou had $89 million in trading losses while a Goldman client, documents show. Those losses translated into big business for Goldman. The firm made $9.5 million from Bayou from 1999 to 2005.

While that is a drop in the bucket for Goldman, which posted a profit of $13.4 billion in 2009, it is significant for the firm’s clearing division. At one point Bayou was a “top 50 clearing client” of Goldman and accounted for 1 percent of all the revenue made by the clearing division, documents show.

Court exhibits and e-mails indicate the firm knew of Bayou’s claims of lofty returns. However, Goldman executives testified during arbitration that they were not aware of Bayou’s assertions of lofty returns.

Goldman’s clearing manual contains a warning to employees about hedge funds, documents show. “If I were going to launder money, I’d use a hedge fund,” wrote Jon S. Corzine, a former Goldman chief executive and now head of the brokerage firm MF Global. “It’s a good way to move large sums of money. There is no supervision, and you don’t have to reveal who your clients are.”

Trading records show Bayou made many large wire transfers, often on the same day. For instance, on Dec. 21, 2004, $1.6 million was wired into Bayou’s no-leverage fund from an account at Wachovia. That same day, five wires went out of the fund for the same amount. The amount came in from one source, and went out to five different ones.

This practice is known as flipping and is suspicious because it could indicate a fund was laundering money. A Goldman spokesman declined to comment, referring instead to testimony by its executives that says its clearing division does not monitor this sort of activity.

Separately, in 2003, Bayou set up four hedge funds for investors, including the no-leverage fund. Goldman executives, however, spotted some funds had similar trading strategies. “Bayou has multiple funds and they tend to all do similar trades,” Mr. Sweeney said in an e-mail in May 2003.

A Goldman spokesman declined to comment, pointing instead to testimony during arbitration where an expert hired by Goldman said that similar strategies in different funds were not uncommon.

Hedge funds often clear through multiple brokerage firms, so losses in one account may not be indicative of the fund’s actual performance. Still, documents show Goldman and Bayou Securities, the hedge fund’s broker-dealer, had an exclusive clearing agreement, which the claimants argued showed Bayou should have been clearing only through Goldman.

A Goldman manager, Kyle Czepiel, told regulators in 2004 during a separate investigation into Bayou’s operations that “the hedge funds never traded away from Bayou Securities,” and Goldman “was the only clearing firm through whom they traded.” During the Bayou arbitration he said that Bayou “might” have traded a few products away from Goldman. Goldman declined to comment.

During the arbitration, the unsecured creditors argued that bankruptcy case law showed that Goldman should be held liable for the losses. One case, Gredd v. Bear Stearns, found that once a clearinghouse was on “inquiry notice” about a possible fraud, meaning it knew or should have known a fraud might have been taking place, it had a responsibility to make a good faith investigation of the suspicious activity.

In the Gredd case, a Bear Stearns executive heard at a party that the Manhattan Investment Fund was reporting big returns to clients. But the executive knew that the fund’s account at Bear was losing money. Eventually Bear notified regulators of the concerns. A jury found Bear should not be held liable for the losses in the fund.

The Gredd case, however, found that to be held liable a clearinghouse has to do more than simply hold the money; it has to exercise some type of control over it. For instance, there may be a margin account, where the clearinghouse has a legal right to access the funds.

“The firm has to do more than simply carry the funds in the customer’s accounts, it has to exercise some discretionary power over the money,” said Henry Minnerop of the law firm Sidley Austin, who wrote a brief in support of Goldman’s motion to vacate the Bayou award.

John G. Rich, a lawyer for the unsecured creditors and a partner at the law firm Rich & Intelisano, said Goldman had the ability to use the funds for its own purpose, and was on inquiry notice about fraud at Bayou, yet did nothing.

“Despite facts showing potential fraud was taking place they put their head in the sand and continued to collect significant commissions from Bayou,” Mr. Rich said.

The Manhattan Fund is different from Bayou in that it constantly had margin debt in its account. Goldman has argued that because Bayou did not have margin debt on the days it was transferring money, Goldman was a mere conduit of the funds and the unsecured creditor’s case was baseless.

July 9, 2010

Goldman Must Pay Some Bayou Losses - New York Times

Below is a New York Times Piece about Bayou v. Goldman Sachs

Goldman Must Pay Some Bayou Losses
By LOUISE STORY and GRETCHEN MORGENSON
Goldman Sachs has been ordered to pay $20.58 million to creditors of a failed hedge fund to settle claims that the bank helped the fund perpetrate a Ponzi scheme.
The award represents the first time that a bank has been held accountable for a Ponzi scheme because of its role as a middleman.
Goldman cleared trades and lent money to the Bayou Group, a Connecticut hedge fund that collapsed in 2005, when state and federal investigators said the firm defrauded investors of hundreds of millions of dollars.
The Bayou fraud resurfaced in 2008 when its founder, Samuel Israel III, faked his own suicide after being sentenced to 20 years in prison for fraud. He later turned himself in and is now serving 22 years.
Bayou’s creditors filed a complaint against Goldman two years ago, saying the bank either knew or should have known of Bayou’s fraud. Goldman, the complaint said, had access to Bayou’s trading records, which showed losses, as well as its marketing materials, which showed profits.
The award, in a decision by an arbitration panel of the Financial Industry Regulatory Authority issued on Thursday, may put other banks on notice to better scrutinize their hedge fund clients’ activities.
“This case shows that you can’t just stick your head in the sand when a fraud is going on in your shop,” said Ross B. Intelisano, a lawyer at Rich & Intelisano, who brought the arbitration against Goldman. The bank “argued that you could, and the panel disagreed.”
A Goldman spokesman pointed to the bank’s filing in the case, which questioned whether the creditors could use bankruptcy laws to hold Goldman accountable for the $20.58 million of investor money that Bayou transferred among its Goldman accounts. The money was never actually conveyed to Goldman, the bank said, so it should not be considered a fraudulent transfer.
The arbitration panel does not determine whether wrongdoing occurred, but merely decides on compensation.
“We are disappointed with the award and are considering our options,” said Ed Canaday, a spokesman for Goldman.
Goldman has limited grounds for vacating an arbitration award, however.
The award to Bayou’s creditors is yet another legal woe for Goldman. The bank is also the target of a Securities and Exchange Commission investigation of its mortgage operations before and during the financial crisis, and Goldman is fighting an S.E.C. complaint and private lawsuits about mortgage securities it created. Goldman has defended its actions in the mortgage market and said the parties that purchased its mortgage deals should have known what they were dealing with.
Although the Bayou case dates long before the financial crisis and has nothing to do with mortgage bonds, Goldman made similar claims in its reply. The bank, for instance, said the creditors of Bayou were “highly sophisticated investors.” Goldman also said it had no duty to monitor the “honesty and the finances” of its account holders.
Goldman served as Bayou’s main prime broker from 1999 to 2005, meaning that the bank had a wide view of the hedge fund’s activities, according to the creditors’ complaint. In that role, Goldman was the custodian of Bayou’s assets and a lender to the fund. Goldman also prepared Bayou’s account statements, the creditors said.
The award represents the amount of money that was put into the Bayou funds held at Goldman between March 2003 and June 2005. It accounts for just over 8 percent of the $250 million in losses that Bayou investors incurred in the fraud. If this award is included in the total recovered by Bayou investors, it will rise to more than half of their losses.
Bayou began losing money long before it went bust, for more than $88 million in losses during its association with Goldman. At the same time, Bayou told prospective investors that it had positive returns. During those years, Bayou marketed its relationship with Goldman as a mark of legitimacy, the creditors said.
Goldman was aware that Bayou was losing money, the creditors said. In 2004, Goldman’s risk managers created a list of the top 10 money losers among its clients. The No. 1 loser was a Bayou fund, and two other Bayou funds were ranker lower. The list, the complaint said, was circulated among Goldman executives.
A month after that list was circulated, Goldman requested and received a copy of Bayou’s marketing materials, which falsely claimed positive returns. Goldman also was warned about Bayou by an outside firm in 2002, the complaint said.
Goldman’s employees, the complaint said, “have repeatedly claimed that they had no obligation to concern themselves with what had occurred at the Bayou Hedge Fund at anytime.”

June 30, 2010

Goldman Told to Pay Bayou Fund Creditors - WSJ

Below is the Wall Street Journal piece regarding Bayou v. Goldman Sachs.

JUNE 26, 2010
Goldman Told to Pay Bayou Fund Creditors
By SUSANNE CRAIG
Goldman Sachs Group Inc. was ordered to pay $20.6 million, the largest arbitration award levied against the securities firm, to unsecured creditors of Bayou Group LLC who accused Goldman of ignoring signs of fraud at the hedge-fund firm.
Bayou collapsed in 2005, and the firm's former chief executive, Samuel Israel III, is serving a 20-year prison term for fraud. He pleaded guilty to misrepresenting the value of Bayou's funds and defrauding clients out of more than $400 million.
Goldman cleared trades for the Connecticut hedge-fund firm before it collapsed. In 2008, Bayou's unsecured creditors' committee filed an arbitration claim against two Goldman units.
"Through either gross negligence or a willful choice to ignore the signs of fraud, [Goldman] failed to diligently investigate the red flags it was made aware of, to contact Bayou's auditors to request additional information, or to alert the appropriate authorities of what it had learned," lawyers for the committee alleged in the claim.
A three-person Financial Industry Regulatory Authority arbitration panel didn't provide an explanation for its ruling, issued Thursday. A Goldman spokesman said the panel didn't conclude that the firm committed any wrongdoing or violated any rules.
In its response to the initial arbitration filing, Goldman said the $20.5 million represents money that was fraudulently transferred among Bayou accounts and was never in Goldman's possession. Clearing operations typically maintain client records and send out trade confirmations, often earning big fees in return.
The Goldman spokesman said the New York company is "disappointed with the award and is exploring its options." Unlike court decisions, it is extremely hard to overturn arbitration awards because courts can't review the facts in an arbitration case. Courts are allowed to reverse such awards only for exceptional reasons, such as finding that an arbitrator acted improperly.
"This is a big victory for the victims," said Ross Intelisano, a partner at New York law firm Rich & Intelisano LLP who represented the Bayou creditors.
The largest previous arbitration award against Goldman was $2.8 million in 1994, according to Securities Arbitration Commentator, a Maplewood, N.J., newsletter that tracks arbitration cases. The Bayou ruling also is the sixth-largest arbitration award to any customer of a Wall Street firm, the newsletter said.
Winning damages from clearing firms is especially difficult because firms are required to spell out their duties in advance, often limiting their liability to only those functions. In its response to the arbitration filing, Goldman said the law "does not require clearing firms or prime brokers to monitor the suitability of the transactions they process or to investigate their account holders." Imposing such a standard "would slow commerce, raise costs and imperil financial markets," the firm said.
Separately, the Financial Crisis Inquiry Commission said Goldman President and Chief Operating Officer Gary D. Cohn and Chief Financial Officer David Viniar will testify at a hearing next week to examine the role of derivatives in the financial crisis.


June 28, 2010

Rich & Intelisano Wins Largest Arbitration Award Ever Rendered Against Goldman Sachs - $20.5 Million

Rich & Intelisano, LLP won a $20.5 million arbitration award against Goldman Sachs related to the Bayou hedge fund Ponzi scheme. The award is 100% of the compensatory damages requested. It is the largest arbitration award ever rendered against Goldman and the sixth largest customer arbitration award against any Wall Street firm. It is also the first win in any court or arbitration forum by investors against a clearing or prime broker related to a hedge fund Ponzi scheme based upon fraudulent transfer theories.

Partner John Rich masterminded the case, and tried it together with partner Ross Intelisano, with significant help from Matt Woodruff, Diane Mall Sammarco and Eric Clem of our office.

The award is on Finra’s website. The Firm represented the Bayou Creditors’ Committee in the 18 day arbitration hearing. The three arbitrator panel held over 13 pre-hearing sessions and 36 hearing sessions in 2008 through 2010.

From 1999 through 2005 Goldman Sachs Execution & Clearing, Goldman’s clearing broker, served as the sole prime and clearing broker for the Bayou funds. During 2002 through 2004, Goldman earned over $5 million in fees from Bayou. The Bayou victims alleged in their complaint that Goldman knew or should have known that Bayou was committing fraud and should have done an investigation into Bayou’s activities at Goldman. Instead, Goldman turned a blind eye to numerous red flags and suspicious activity in order to continue to reap fees.


April 20, 2010

RaceTrac Arbitration May Show ABACAS Investors’ Best Path to Recover Against Goldman

Investors who lost $1 billion in the Goldman Sachs structured ABACAS CDO were handed a strategic road map by the SEC when it filed the civil fraud complaint against Goldman on Friday. The alleged misrepresentation to ACA by Goldman that Paulson was long the equity tranches of ABACUS and the omission to disclose to ABACUS investors in writing and orally that Paulson handpicked securities in ABACUS while it was simultaneously shorting the same securities are the crux of a potential claim by ABACUS’ investors against Goldman. But what path should investors forge to recover their losses? Court or arbitration? The recent RaceTrac v. Bear Stearns arbitration award shows that a large investor can win a private arbitration against a significant brokerage firm related to misrepresentations and omissions of CDO’s regardless of the risk disclosure language contained in the prospectus.

Since the subprime market meltdown, only one multi billion dollar investor has received a legal award or judgment against brokerage firm for misrepresenting and materially omitting to disclose facts related to CDOs. RaceTrac Petroleum, an Atlanta-based chain of more than 525 retail gasoline convenience stores in the southeast U.S., won a $3.4 million award against Bear Stearns in December 2009. The FINRA arbitration panel ruled that Bear Stearns was liable for misrepresentation and material omission, negligence and failure to supervise related to the Bear Stearns High Grade Funds, a CDO packed hedge fund which caused $1.6 billion in losses in 2007.

The issues in the Goldman ABACUS case are very similar to the Bear Stearns High Grade case. Did Goldman misrepresent or omit disclosing a material fact to the ABACUS investors? Instead of filing a lengthy, costly, public civil lawsuit against Bear Stearns, RaceTrac filed an arbitration claim at FINRA in December 2007 seeking $5 million in damages. Federal prosecutors filed criminal charges against the funds’ portfolio managers, Ralph Cioffi and Matthew Tannin. In March 2009, on the eve of the arbitration hearings in Atlanta, the U.S. Attorneys’ Office in New York ran into federal court in Brooklyn to try to stop RaceTrac from going forward with the arbitration until the criminal trials of Cioffi and Tannin were completed. Judge Block shut the government down and allowed RaceTrac to proceed. A jury then acquitted Cioffi and Tannin of all criminal charges November 2009. However, after 16 days of private arbitration hearings, the FINRA arbitration panel ruled that Bear Stearns was liable and awarded damages of almost 70% of RaceTrac’s investment.

The RaceTrac case took only two years and was won irrespective of the criminal acquittals. There are pending SEC actions against Cioffi and Tannin. The award shows that a large investor may want to choose a quiet, less expensive venue in which equity plays a role as opposed to a civil fraud complaint in court which is exposed to motions to dismiss and will be a three ring circus.

April 16, 2010

ABACUS Lawsuits Against Goldman Sachs Coming?

The investment world is buzzing about the SEC’s fraud allegations against Goldman Sachs for misrepresenting and omitting to disclose Paulson’s role in choosing RMBS securities for the ABACUS CDO and then shorting the same individual RMBS through CDS transactions with Goldman. According to the SEC, “investors in the liabilities of ABACUS are alleged to have lost more than $1 billion.” It is hard to tell whether direct investors in ABACUS lost $1 billion or whether that includes companies which had CDS risk exposure to it. Either way, what are the money losers going to do about it?

According to the SEC complaint, IKB, the German commercial bank, bought $150 million of Class A-1 and Class A-2 Notes which seem to look like the AAA-rated upper tranches of ABACUS. But there is no other disclosure of who else bought ABACUS from Goldman. I presume that IKB was very cooperative with the SEC and allowed its name to be used in the complaint as opposed to being dubbed “Investor #1". IKB has likely been negotiating with Goldman behind the scenes. I expect to see a civil complaint filed by IKB against Goldman in federal court in New York shortly. However, they are probably better off arbitrating the dispute for numerous reasons (privacy, low cost, limited dispositive motion practice, etc.).

The SEC complaint also explains how a division of ACA, the monoline insurance company, served as the “Portfolio Selection Agent” for ABACUS, and another division of ACA (ACA Capital) also sold protection on $909 million of the super senior tranche of ABACUS through credit default swaps as well. ABN AMRO, the European bank, then assumed that same exposure through CDS deals with Goldman and ACA. The complaint alleges Goldman defrauded IKB, ACA and ABN AMRO. ABN AMRO was bought by the Royal Bank of Scotland and after ABACUS went to almost zero, RBS paid Goldman $841 million, most of which was then paid by Goldman to Paulson due to Paulson’s short bets on the underlying tranches. Got that?

So, RBS is holding the potential claims against Goldman (and Paulson?) for $841 million. Very interesting to see if RBS sues either of them.

But what about the rest of the ABACUS investors? According to the Flip Book available on Reuters’ website, ABACUS was a $2 billion synthetic CDO. Who else bought it besides IKB? And what are these investors going to do once they’ve read the SEC complaint? I have a guess or two.

By the way, Goldman netted $15-20 million for structuring and marketing ABACUS. Amazingly, Paulson paid Goldman $15 million to allow it to help pick the RMBS for ABACUS. This is a killer fact for the SEC.

April 16, 2010

Goldman Sachs Charged in ABACUS CDO Case By SEC

The SEC charged Goldman Sachs with defrauding investors of ABACUS 2007-AC1, a synthetic CDO created and sold by Goldman in early 2007 when the subprime world was reeling. Investors in ABACUS ultimately lost $1 billion.

The SEC's civil fraud complaint alleges that Goldman allowed the multi billion dollar hedge fund Paulson & Co. to help select RMBS (residential mortgage backed securities) for the Abacus CDO, knew that Paulson was concurrently shorting specific tranches of the CDO but did not disclose anything about Paulson to investors in the CDO offering documents or marketing materials.

This is a huge development in that it shows SEC has the fortitude to file actions against the biggest firm of all related to its failure to disclose material information to investors. Goldman will likely be the brunt of civil lawsuits or arbitrations related to the ABACUS CDO. The next question is whether the SEC will file claims against Paulson as well.

CDOs and synthetic CDOs are extremely complex investments which are at the heart of the Bear Stearns High Grade Funds cases our firm is handling.

November 19, 2009

Goldman Sachs’ Public Image

There’s a very good piece in the Financial Times today about Goldman Sachs by Francesco Guerrera and Tom Braithwaite. It’s available online at http://www.ft.com/cms/s/0/1eb0ea18-d497-11de-a935-00144feabdc0.html?nclick_check=1

The authors explain how competitive Goldman is and how profits and risk management drive the firm. They go on to explain how difficult it will be for Goldman to handle the backlash of paying out huge bonuses in an environment of double digit unemployment rates.

For a long time, Goldman was by far the gold standard of investment firms. Much of the financial crisis stems from every other firm trying to be like Goldman and making huge, leveraged bets with proprietary capital. The difference has been that Goldman has always one stop ahead of the rest of the Street. Partly due to the “market color” it receives as an investment bank, prime broker, clearing firm, counter party, and trader, Goldman somehow is nimble enough to know when to stop on a dime and bet the other way. Merrill, Citi, Morgan and the rest could never do that. Merrill, especially, was three steps behind and was late to the CDO game just like it was late to the prop trading game and the internet craze.

Goldman is now in a bind. It’s entire business model is based upon paying employees who generate profits for the firm. It has generated huge profits using cheap money. Did the world really expect Goldman not to take advantage of the low cost of borrowing and two less competitors in the market place (Lehman and Bear)? Now, the press will hammer Goldman if the firm follows its normal course of business. But if the Goldman trader who’s P&L is up $20 million for the year gets stiffed on his bonus, he’s leaving for a hedge fund. It’s that simple.

Have no fear though, Goldman is smart enough to figure a way out that no other firm has thought of. And haters can continue to hate Goldman just like baseball fans outside of New York hate the Yankees.