By Nicholas Zelinsky
Money & Investing Writer
Goldman Sachs (NYSE: GS). A multinational investment banking firm that is known for its position as a powerhouse in the investment banking industry made its way into the eyes of the SEC recently, and it’s not with any intent of a friendly hello.
This past Thursday, Goldman Sachs had to pay $15 million dollars to settle a civil case relating to the securities lending practices violating federal regulations.
According to the Securities and Exchange Commission, Goldman made appearances to customers that requested the firm would locate certain stocks to short sell.
Goldman responded to the customers that the company had arranged, and believed that they were capable of borrowing, the security to settle the short sale. This process is known as “granting locates.”
The problem in what Goldman came when the company failed to perform an adequate review of the securities that they were asked to locate by their customers.
Regarding this case Goldman was involved with, a Goldman Sachs spokeswoman said “We are pleased to have resolved this matter with the SEC.”
The charges fell upon Goldman due to the lack of knowledge the company had with respect to borrowing the security.
According to U.S. regulations for short selling, in order for brokerages to enter in any agreement to borrow securities on behalf of their customers, they are required to have “reasonable grounds” for believing they can borrow the security.
The basis behind requiring companies to be certain of their ability to borrow the security is to help prevent illegal short selling, a term that may be more commonly known as “naked shorting.” “Naked shorting,” or illegal short selling, is the practice of selling shares that have not been confirmed about their existence.
From 2008 to 2013, a team of Goldman Sachs employees used an automated system to fill their customers’ stock requests.
The fault in this automated system came when employees had the ability to grant customers’ “locate” requests based on the inventory reported to Goldman.
This report would be given earlier in the day by outside financial institutions, despite the fact that this was taking place after their inventory had been depleted as the team was processing requests throughout the day.
To make the matters worse, the team did not check other sources for securities to thoroughly perform a “meaningful further review,” according to the SEC.
This $15 million settlement focused on the rule violations and did not contain any instances of customers whose short selling was disrupted because of Goldman’s automated system.
According to the SEC, Goldman had identified problems with their automated stock location system back in 2011.
The firm developed a new system between 2011 and 2013, however employees were still improperly processing customers’ requests.
The SEC also said that Goldman gave incomplete and unclear responses to information requests coming from the SEC compliance examiners back in 2013 in regards to the firm’s securities lending practices.
A version of this article appeared in the Tuesday, January 26th print edition.
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