Goldman Sachs and Bayou Group

The following article gives a glimpse into Goldman Sachs's business style--how it justifies its actions even when fraud may be occurring through the actions of one of its clients. Raking in money from fees is more important than paying attention to wrong doing: that is the emphasis in the litigation of creditors who accuse Goldman Sachs of ignoring the "Ponzi" scheme of the hedge fund Bayou Group.

In Clearing Bayou, Quagmire for Goldman

By SUSANNE CRAIG -The New York Times, Dealbook

“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.

Read the full article and see the supporting documents here
Another article on this subject can be found here