Posted in: Risky Investments | RMK Funds |
The New York Times reports that Goldman Sachs has been ordered to pay $29,580,000 to creditors of a hedge fund. The creditors claimed that the bank had helped the hedge fund finance and maintain a ponzi scheme.
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 was made by a FINRA arbitration panel, and appears to be the first time that an investment bank has been held financially responsible for helping to fund what turned out to be a ponzi scheme.
This is encouraging news. But given the billions of dollars of bonuses that Goldman Sachs and other investment banks have paid in recent years, it is unlikely that a $20 million award will force Goldman to scrutinize the deals it funds any more closely. As the investors in this case found out, it takes a lawsuit to hold brokerage firms even somewhat accountable.
