Goldman Sachs agreed to pay $7 million in disgorgement and civil penalties to settle CFTC charges that it failed to diligently supervise accounts that it carried from about May 2007 to December 2009.  In addition, the Goldman unit agreed in the order that it has made changes in light of the relevant events discussed in the order, including implementing enhanced supervision policies, procedures, and training. CFTC Findings and Allegations. Goldman Sachs Execution & Clearing, L.P. (GSEC), a NY-based registered FCM (futures commission merchant), provided back-office and other services to some clients who themselves are broker-dealers.  One such broker-dealer offered memberships to investors to trade commodities in subaccounts of the broker-dealer carried by GSEC.  However, 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.

e.g. - 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 CFTC found 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.

e.g. - In a second example, in August 2009, GSEC learned that the broker-dealer distributed to at least 1 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, despite these signals of questionable conduct, GSEC is alleged to have 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 $6.8 million since October 2009.

CFTC Statement. “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.” --  David Meister, CFTC Enforcement Director. CFTC Staff Credits. 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. [CFTC Press Release 6206-12, 3/13/12]