In 2023 FINRA Settles With Goldman Sachs Over Mismarked Short Sales Dating Back to 2015

April 5, 2023

There are times when Wall Street's regulators just don't seem in much of a rush. And when of the industry's big whales is involved, well, y'know, everything seems to slow down. If it were one of the small fry, however, we all suspect that things would have moved quicker and with more devastating sanctions. In a recent FINRA settlement, that regulator alleged that Goldman Sachs had engaged in short selling misconduct October 2015 to April 2018 involving 60 million short sale orders. 2015. 2018. And here we are 2023. What took so long?
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue,  Goldman Sachs & Co. LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of  Goldman Sachs & Co. LLC , Respondent (FINRA AWC 2018059146501)
The AWC asserts that Goldman Sachs & Co. LLC has been a FINRA member firms since 1936 with about 8,500 registered individuals at about 70 branches. In accordance with the terms of the AWC, FINRA imposed upon  Goldman Sachs & Co. LLC  a Censure and  a total fine of $3 million of which only $1,147,500 is payable to FINRA and the remainder to be allocated among  Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., Investors Exchange LLC, The Nasdaq Stock Market LLC, Nasdaq BX, Inc., Nasdaq Phlx LLC, The New York Stock Exchange LLC, NYSE American LLC, and NYSE Arca, Inc. As alleged in part in the AWC:
From October 2015 to April 2018, Goldman mismarked 59,981,252 short sell orders as long, of which 26,944,700 were sent to an alternative trading system (ATS). These orders represented less than one percent of Goldman’s total principal sell orders during this time period. The orders were auto-generated to promptly hedge the Synthetic Product Group’s (SPG) synthetic risk exposure resulting from its execution of equity swap transactions with clients. The mismarked orders were caused by Goldman’s implementation of an upgrade to the relevant automated trading software that was intended to simplify this order flow. Goldman inadvertently failed to include a single line of code that was designed to copy the long or short mark from a parent sell order and affix it to the instantaneously created child sell order(s) that were routed to the market. While the parent orders were accurately marked as short sales and a locate was obtained for each, the child orders did not receive the short sale order mark of the parent order due to the missing line of code. The firm immediately fixed this coding error after being notified by FINRA in April 2018. 
Separately, Goldman misapplied order marking logic to sell orders routed to the firm by a foreign affiliate in a manner that resulted in certain of those orders being inaccurately marked short. A sample of six months of data revealed that approximately 670 orders of that foreign affiliate were broken up into child orders with the incorrect short sale indicator and sent to various market centers resulting in 26,377 executions, including 6,176 sent to an ATS.3 Goldman corrected this error after being notified by FINRA in October 2019. 
By incorrectly marking short sale orders as long, Goldman violated Regulation SHO Rule 200(g) and FINRA Rule 2010.
By marking short sell orders as long, Goldman also violated FINRA rules relating to filing accurate trade reports and maintaining accurate order memoranda.
. . .
Goldman mismarked and routed 59,981,252 short sale orders as long. Of those 59,981,252 orders, 7,866,996 were executed. The firm maintained inaccurate memoranda for each of those sales. Also, 26,944,700 of the erroneously marked orders were routed to an ATS for execution—resulting in the execution of 2,117,624 orders on an ATS in NMS and OTC securities. The firm submitted inaccurate trade reports to FINRA with respect to those 2,117,624 orders.

As a result, Goldman violated Exchange Act § 17(a) and Exchange Act Rule 17a3(a)(7)(i), and FINRA Rules 4511, 6182, 6624, and 2010. 
. . .
By failing to have supervisory reviews reasonably designed to ensure the mismarked orders were appropriately marked long or short consistent with Regulation SHO, order marking, and books and records requirements, Goldman violated FINRA Rules 3110 and 2010. 
= = =
Footnote 3: The sample data set was drawn from the time period January 2018 through June 2019. 
Bill Singer's Comment

Did you catch this assertion in the AWC:
The firm immediately fixed this coding error after being notified by FINRA in April 2018. 
If FINRA knew about some/most of Goldman Sachs' misconduct by April 2018, then why the hell are the charges only now getting settled in April 2023? Oh my,  how meticulous and painstaking FINRA was in building its case against Goldman Sachs for five years from the regulator's apparent awareness that something was amiss in April 2018.
Also, let's consider that the AWC alleges that Goldman Sachs' misconduct transpired from October 2015 to April 2018. Just to reiterate the impact of the multi-year misconduct:
  • 60 million short sale orders 
  • Over 14 billion shares
  • Some eight million orders involving over a billion shares,
  • 12,335 of the executed orders were executed at or below the national best bid while a short sale circuit breaker was in effect

Few issues attract more heated debate and more vicious online anger than short selling by large market participants. Notably, critics ask where Wall Street's regulators were and what they were doing during times of market stress -- as in when a circuit breaker.

Frankly, when alleged misconduct by the likes of a financial conglomerate such as Goldman Sachs takes place in 2015, 2016, 2017, 2018, and 2019, it's fair to ask just where the hell the market's regulators were during all of those years. It's fair to ask how the industry's regulators contemporaneously missed all the signs and warnings. Finally, we are entitled to ask if there is any justice -- and meaningful regulation -- afoot when it takes some four years after the last alleged year of misconduct to merely settle charges of long-lasting and pervasive non-compliance. Oddly, there's no mention of Goldman Sachs' "extraordinary cooperation" in fixing this mess and responding to FINRA's allegations. See, "FINRA Releases New Guidance on Credit for Extraordinary Cooperation" (FINRA News Release / July 11, 2019)

Since 2021, Kathryn Ruemmler, Esq. (Goldman Sachs Group Inc.'s Executive Vice President, Chief Legal Officer, and General Counsel) sits on FINRA's Board of Governors. "FINRA Board Appoints Deborah Bailey and Kathryn Ruemmler as Newest Governors" (FINRA News Release / January 8, 2021) As noted in Ruemmler's online FINRA biography, she is a FINRA Industry Governor / Floor Member Representative, and she serves on FINRA's Nominating & Governance Committee and its Regulatory Policy Committee. And despite all of that, there was no "extraordinary cooperation" from Goldman Sachs noted in the 2023 AWC.

The FINRA Regulatory Policy Committee members (of which Ruemmler is one) serve as the FINRA Regulation, Inc. Board of Directors -- that's no small dual role because that involves the "primary day-to-day responsibility for the regulation, surveillance, examination and disciplining of member firms and registered persons, with respect to market activities as well as other self-regulatory matters." And despite all of that, there was no "extraordinary cooperation" from Goldman Sachs noted in the 2023 AWC. 

None of this is about Ruemmler personally. All of this is about Goldman Sachs and the appropriateness of that firm's General Counsel sitting on FINRA's Board at this moment in time. Again, this blog is not a personal attack against FINRA Governor Ruemmler; but it is an attack against FINRA and its lackluster Board of Governors. The investing public deserves better. The industry deserves better. What we need is advocacy and transparency. We need accountability. We need FINRA to act more like a regulator and less like some trade group on steroids. 

Given Ruemmler's role on FINRA's Board, I believe that it was incumbent upon FINRA to disclose, even if only in a footnote, that Governor Ruemmler had no role in the investigation or settlement aspects of the AWC -- and that FINRA Staff was ordered to have no contact or communication. There is no such disclaimer. Given the facts set out, in this situation with these circumstances, a disclaimer should be a default disclosure.

I note that Governor Ruemmler did not execute the AWC on behalf of Goldman, which is appropriate given my concerns noted above. The Goldman Sachs AWC was executed by "David Markowitz, Global Co-Head of Litigation and Regulatory Proceedings." Of course, Markowitz's signing off on the AWC on behalf of Goldman does not come without conflicts. As reported in part in "Orrick hires Goldman Sachs litigation chief Cafasso" (Reuters by Jonathan Stempel / November 4, 2021)

Goldman separately on Thursday announced the promotion of two lawyers, David Markowitz and Stephanie Goldstein, to global co-heads of litigation. They will report to Kathryn Ruemmler, the investment bank's general counsel and chief legal officer, according to an internal memo.

Also read: "Sexism On Wall Street: The Cowardly Silence Of FINRA's Board Of Governors" ( Blog /  November 28, 2022)

UPDATE/April 10, 2023:

CFTC Orders Goldman Sachs to Pay $15,000,000 for Violations of Swap Business Conduct Standards / Swap Dealer Failed to Disclose Pre-Trade-Mid-Market Marks and Failed to Communicate in a Fair and Balanced Manner (CFTC Release)
A CFTC Order settled charges against Goldman Sachs & Co. LLC that the firm failed to disclose dozens of pre-trade-mid-market marks (PTMMM), in violation of Regulation 23.431, and failed to communicate to clients in a fair and balanced manner based on principles of fair dealing and good faith, in violation of Regulation 23.433. Goldman admitted that for nearly all “same-day” swaps executed in 2015 and 2016, it either failed to disclose any PTMMM or failed to disclose an accurate PTMMM, and that this conduct violated a CFTC regulation. The CFTC Order imposed a $15,000,000 civil monetary penalty. As alleged in part in the CFTC Release:

The order finds that in 2015 and 2016, Goldman transacted dozens of “same-day” equity index swaps with U.S.-based clients. In a “same-day” equity index swap, the equity leg of the swap strikes on the “same day” as the other material terms of the swap are agreed upon, rather than—as is typical—the day after the date of agreement. The order finds that Goldman failed to disclose to clients the PTMMM of these swaps—often disclosing a PTMMM for a different swap (the analogous “T+1” swap) instead, thereby obscuring the value of the same-day swap.

The order finds that Goldman opportunistically solicited or agreed to enter into same-day swaps only on days and at times that were financially advantageous to Goldman and disadvantageous to its clients. Moreover, the manner in which Goldman communicated to clients caused the same-day swaps to appear more economically advantageous to the clients than they actually were. As found in the order, in certain instances, Goldman disclosed a PTMMM for the “T+1” swap and then bid over it for the “same-day” swap, giving the client the impression that the same-day swap was a better deal for the client than the T+1 swap when, in fact, it was not. Indeed, the order finds any marginal benefit Goldman offered to clients on the interest rate leg of the swap would be outweighed by the cost to clients on the equity leg when transacting “same day.” The order finds that Goldman failed to communicate in a fair and balanced manner by touting the supposed benefits of same-day swap transactions, but not the corresponding costs.

Bill Singer's Comment: As in this is 2023 and the misconduct took place in 2015/2016 -- as in seven to eight years ago.  What took so long? (Don't bother to answer: That's both a rhetorical and cynical question).

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