A federal judge turned down Goldman Sachs’ bid to throw out a huge FINRA arbitration award over the responsibilities of a clearing broker.
The decision not to overturn the judgment, made earlier this week by the U.S. district court in lower Manhattan, threatens the clearing business, industry officials contend. It is a decision they have previously said that could cripple the clearing business if it stands.
The debate is over the responsibilities of the clearing broker in case of a failed hedge fund, Bayou Group. Unsecured creditors in the hedge fund failure blamed the clearing brokerage, Goldman Sachs, for failing to "investigate the fraud and the fraudulent transfers."
But Goldman Sachs, along with industry trade group SIFMA, said the introducing broker, not the clearing broker, is responsible for knowing the client.
As a defense, SIFMA cited NYSE Rule 382, which was amended in 1982. Citing that rule, SIFMA attorneys have said "know your customer responsibility became solely that of the introducing firm."
Officials for both Goldman Sachs and SIFMA declined to comment on the judgment. However, industry sources privately said that the decision could be appealed to a higher court, although a decision hadn’t been made at presstime.
Goldman Sachs will likely lose again if it appeals the latest decision, a securities attorney fa,iliar with the case predicts.
"The arbitration was a unanimous decision and courts are hesitant to overturn arbitrations decisions because both sides agreed to the arbitration," says Stephen Nelson, a securities attorney with his own firm in White Plains, New York.
Nelson said the point of arbitration is to settle issues without going to court. He said Goldman Sachs would have to prove some irregularity or massive ignorance of the law to overturn the judgment.
