A request to throw out the record arbitration award against Goldman Sachs earlier this year was denied, and so, the firm is still obligated to pay $20.6 million to unsecured creditors of hedge fund manager Bayou Group.  Goldman was accused of ignoring signs of fraud at the firm - Bayou Group, which collapsed in 2005.  The arbitration claim was filed in 2008 by Bayou's unsecured creditors’ committee.

Former Bayou CEO Samuel Israel III is serving 20 years for fraud, after pleading guilty to misrepresenting the value of Bayou’s funds and defrauding clients of more than $400 million.  Goldman had cleared trades for CT-based Bayou before its collapsed.   

U.S. District Court Judge Jed Rakoff issued the order today, Monday, noting:  “After full consideration of the parties’ briefs and oral argument, the court hereby denies the petition to vacate the arbitration award and grants the cross-petition to confirm the award.”  “However final judgment will not be entered in this case until the court issues an opinion setting forth the reasons for this ruling.”

If ultimately upheld, the award could have ramifications throughout the financial sector.  Wall Street firms, which handle billions of dollars in trades, say that their job is to clear the trade, not police the clients.  This award could raise the bar or standard for clearing.  Goldman apparently still has more avenues to appeal the award.  

Ross Intelisano, whose law firm represented the Bayou creditors, had this to say:  “We are looking forward to investors finally getting some of their money back from this tragic fraud.”    [NYT Dealbook, 11/8]