In 2008, Goldman opted for arbitration, over bankruptcy court, in a case stemming from the collapse of the Bayou Group.  In 2010, Goldman went to court to vacate the arb panel's ruling.  In November, Judge Jed Rakoff denied the request.  On Tuesday, 11/30, Judge Rakoff issued a 13-page opinion, which probably stung as much as the $20.6 million award by the panel.  [To access the judge's opinion, click onto:  NYT Dealbook, 11/30 ]

    Case Stemming from Collapse of the Bayou Group.   In 2008, unsecured creditors of CT-based Bayou filed a claim against Goldman, arguing the firm ignored signs of wrongdoing at Bayou.  The hedge fund had collapsed, and its former CEO, Samuel Israel III is serving a 20-year prison sentence.  Goldman had, for years, cleared trades for Bayou. 

Under terms of its contract with Bayou, Goldman could have applied to fight the case in bankruptcy court. Goldman opted for arbitration - although theoretically, both sides could have agreed to "waive the arbitration clause and litigate in court, but either could have insisted on arbitration,” according to a Goldman spokesperson. 

Earlier this year, a 3-person FINRA panel ordered Goldman to pay $20.6 million to the unsecured creditors of the Bayou Group.  Unhappy with the findings - the largest ever levied against the firm - Goldman went to court and moved to vacate the arbitration award.  The firm argued that the panel had “manifestly disregarded the law” and exceeded its authority under the Federal Arbitration Act.

    Judge Rakoff Forcefully Explains His Decision.   "Although arbitration is touted as a quick and cheap alternative to litigation, experience suggests that it can be slow and expensive.  But it does have these ‘advantages’:  unlike courts, arbitrators do not have to give reasons for their decisions, and their decisions are essentially unappealable."  Goldman, "having voluntarily chosen to avail itself of this wondrous alternative to the rule of reason, must suffer the consequences." 

John Rich, a law partner at Rich & Intelisano who represented the Bayou creditors, said, "The Bayou investors are gratified that the judge gave proper deference to the arbitrators’ findings about Goldman’s conduct."

    Goldman's Next Option.   Goldman can appeal Judge Rakoff’s decision to the Second Circuit Court of Appeals.  If ultimately upheld, the Bayou award could have ramifications across the financial sector.  Wall Street firms, which handle billions in transactions, say that their job is to clear trades, not police clients.  This award could raise the standard for clearing businesses. 

Next Case.