Goldman Sachs Execution & Clearing (GSEC), a registered futures commission merchant based in New York, NY, has agreed to pay a USD5.5 million civil monetary penalty and USD1.5 million in disgorgement to settle CFTC charges that it failed to diligently supervise accounts that it carried from about May 2007 to December 2009.
The CFTC order also requires GSEC to cease and desist from violating CFTC regulations requiring diligent supervision. Additionally, the order states that GSEC represented in its settlement offer that it has made changes in light of the events discussed in the order, including implementing enhanced supervision policies, procedures, and training.
GSEC provided back-office and other services to some clients who themselves are broker-dealers, according to the order. One such broker-dealer (Broker-Dealer) offered memberships to investors to trade commodities in subaccounts of the Broker-Dealer carried by GSEC, the order finds. GSEC failed to diligently supervise the handling of these subaccounts when it did not investigate signs of questionable conduct by the Broker-Dealer, according to the order. For example, in May 2007, at the beginning of GSEC’s relationship with the Broker-Dealer, the Broker-Dealer’s lawyer represented that the Broker-Dealer would not engage in commodity futures trading and therefore would not need to register as a commodity pool operator with the CFTC. However, the order further finds that the Broker-Dealer had already opened a commodity futures trading account with GSEC and, thereafter, traded commodity futures. Nevertheless, GSEC did not investigate the apparent contradiction between the lawyer’s representations and the Broker-Dealer’s actions, the order finds.
The order states, as another example, that in August 2009, GSEC learned that the Broker-Dealer distributed to at least one of its members a subaccount statement that falsely purported to have been issued by a non-existent GSEC affiliate. In addition to noting that no such GSEC affiliate existed, GSEC told the Broker-Dealer that the statement created an inaccurate picture of the Broker-Dealer’s overall performance. Yet, as the order further finds, despite these signals of questionable conduct, GSEC simply instructed the Broker-Dealer not to issue such an account statement and accepted the Broker-Dealer’s assurances that it had not done so before and would not do so again. In December 2009, the Broker-Dealer provided to GSEC a draft disclosure statement that disclosed that the Broker-Dealer had carried negative capital balances of approximately USD6.8 million since October 2009, according to the order.
From May 2007 to December 2009, GSEC received approximately USD1.5 million of gross fees and commissions for transactions it executed and/or cleared on behalf of the Broker-Dealer, the order finds.
According to CFTC Division of Enforcement Director David Meister: “The CFTC’s rules mandate that registrants diligently supervise their employees and agents. When registrants become aware of questionable activity, they must not simply rely on assurances from interested parties and their representatives, but instead must diligently investigate. As this case indicates, the Commission will hold registrants accountable if they fail in this regard.”
The CFTC appreciates the assistance of the National Futures Association, the Chicago Board Options Exchange, and the US Securities and Exchange Commission.
CFTC staff members responsible for this case are Laura Martin, Janine Gargiulo, Candice Aloisi, Judith Slowly, David Acevedo, Manal Sultan, Lenel Hickson, Lisa Hazel, Annette Vitale, Ronald Carletta, Stephen Obie, and Vincent McGonagle.