Wall Street Regulators Provide Express Check-Out Line for Goldman Sachs

September 26, 2023

Goldman Sachs & Co. is a powerhouse in investment banking, global securities markets, investment management, and consumer banking. In recent years, Goldman's alumni have left their mark on business, government, and regulation. Former Treasury Secretaries Robert Rubin, Hank Paulson, and Steve Mnuchin all came from Goldman. Former Goldman partner Gary Gensler once chaired the CFTC and now chairs the SEC. Current Goldman Chief Legal Officer and General Counsel Kathryn Ruemmler fills the Floor Member Governor's seat on FINRA's Board and serves on FINRA's Nominating & Governance Committee and its Regulatory Policy Committee. There are lots of other former Goldman folks who sit on many major boards and serve in important government roles all over the world; see: https://en.wikipedia.org/wiki/List_of_former_employees_of_Goldman_Sachs.  Goldman's influence is so legendary that it's referred to as "Government Sachs."

The public benefits from having highly educated and accomplished men and women in civil service -- even if those folks once made big bucks at Goldman or will reap such remuneration there after their government roles end. When the old revolving door swings too frequently and too quickly, however, the public suffers from too much influence being exerted by the likes of Goldman and too much deference being afforded to the firm by those in government and regulation. 

Goldman's recent regulatory lapses and the response to those violations by Wall Street's regulators raise eyebrows and concern. Back in May 2023, I called for a boycott of FINRA's 2023 elections, in part, to protest the ongoing presence of Goldman's General Counsel on FINRA's Board. Although this year's Board elections ended on September 6, 2023, FINRA still refuses to release the numbers of votes cast for the two unopposed candidates and refuses to release the numbers of votes-in-abstention cast. Making matters worse, the SEC fails to compel FINRA to publish a full and fair disclosure of the recent elections. For some additional context, read:

SEC September 2023 Goldman Settlement

On September 22, 2023, the SEC published "Goldman to Pay SEC $6 Million in Penalties for Providing Deficient Blue Sheet Data" https://www.sec.gov/news/press-release/2023-191
The underlying SEC Order https://www.sec.gov/files/litigation/admin/2023/34-98479.pdf alleged that Goldman Sachs & Co. LLC had failed to provide complete and accurate securities trading information ("Blue Sheet data") to the SEC. As alleged in part in the SEC Release:

[O]ver a period of approximately ten years, Goldman made more than 22,000 deficient blue sheet submissions to the SEC. The order finds that, as a result of 43 different types of errors, these submissions contained missing or inaccurate trade data for at least 163 million transactions. The order further finds that Goldman lacked adequate processes to verify the accuracy of its electronic blue sheet submissions.

. . .

The SEC's order finds that Goldman willfully violated the broker-dealer recordkeeping and reporting provisions of the federal securities laws. Goldman admitted the findings in the SEC's order and agreed to be censured and to pay the $6 million penalty. The SEC's order also finds that Goldman engaged in remedial efforts to correct and improve its blue sheet reporting systems and controls, including conducting a full-scale review of its reporting program that resulted in the self-reporting of 29 of the 43 types of errors underlying the order and significant supervisory control enhancements.

Separately, the Financial Industry Regulatory Authority (FINRA) reached a settlement with Goldman for related conduct.

Beyond the puffery of the SEC's press release, the actual SEC Order bluntly alleges that Goldman willfully violated federal securities laws:

11. As described above, Goldman failed to furnish complete records to the Commission staff that were requested by the Commission in its EBS requests. Therefore, Goldman willfully1 violated the recordkeeping and reporting requirements of Section 17(a)(1) of the Exchange Act and Rule 17a-4(j) thereunder by failing to furnish promptly true and complete EBS information as requested by Commission staff over a period of at least 10 years. In addition, Goldman willfully violated Exchange Act Rule 17a-25 by failing to submit electronically certain securities transaction information to the Commission through the EBS system in response to requests made by the Commission.
= = =
1 “Willfully,” for purposes of imposing relief under Section 15(b) of the Exchange Act and Section 203(e) of the Advisers Act, “‘means no more than that the person charged with the duty knows what he is doing.’” Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (quoting Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949)). There is no requirement that the actor “also be aware that he is violating one of the Rules or Acts.” Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965). 

And that willful misconduct manifested itself in the form of 22,192 inaccurate trade-data reports involving 163 million transactions during 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020, 2021, and 2022. Yeah, it looks much worse when you actually set out the years like that, no? Let's not get too carried away with the SEC's apparent harsh appraisal of Goldman, however, because the SEC Order wants you to know that as bad as "willfully" looks, it only means that Goldman "knows what [it] is doing" but that doesn't also mean that Goldman was "aware that [it] is violating one of the Rules or Acts." How comforting it is to know that for over a decade, Goldman knew what it was doing when it filed "inaccurate trade data for at least 163 million transactions." During all of those years, the revolving door swung between Goldman and the government. During the Obama Administration. During the Trump Administration. During the Biden Administration. How odd that despite the whirling of the spinning doors, the SEC never had any hint, not so much as a clue, that Goldman's trade-data reports were inaccurate. 

The SEC's empathy and sympathy for Goldman doesn't stop with the regulator's unabridged definition of "willfully." Oh my, not by a long shot. As set out in the SEC Order: 

Goldman’s Remedial Efforts

In determining whether to accept the Offer, the Commission considered remedial acts undertaken by Respondent and cooperation afforded the Commission staff.

Remedial Acts?  Cooperation? Despite the SEC's conclusion that Goldman's violations were willful and transpired over a decade, the federal regulator still battled with pangs of conscience when it came to accepting a paltry $6 million penalty from one of Wall Street's most influential firms. How do you square such considerations with ten years of willful violations of federal laws? Goldman had the resources to hire extra staff and install additional software in order to avoid the very misconduct at issue. Goldman had the resources to detect the very misconduct at issue. Goldman had the resources to nip this all in the bud far earlier than after ten years. Ahhh, but the SEC says nevermind because Goldman had engaged in remedial acts and cooperated when the recordkeeping mess manifested itself. All of which is the latest iteration of garbage regulation on Wall Street.

CFTC August 2023 Goldman Settlement

Glossed over in the September 22, 2023, SEC press release announcing its $6 million settlement with Goldman, was this earlier August 29, 2023, CFTC press release: "CFTC Orders Goldman Sachs to Pay $5.5 Million for Recordkeeping Violations and Violating a Prior Commission Order"
https://www.cftc.gov/PressRoom/PressReleases/8769-23 . When I say "glossed over," what I mean is that the acronym "CFTC" doesn't even show up in the nearly one-month-later SEC press release -- as if the latter federal regulator isn't even on speaking terms with the former.
As alleged in part in the CFTC Release:

In November 2019, the CFTC entered an order that found Goldman failed to record the phone lines of a trading and sales desk for 20 calendar days in January and February 2014, after its recording hardware malfunctioned following a software patch. The CFTC ordered Goldman to pay a $1 million civil monetary penalty and to cease and desist from further violations of CFTC recordkeeping provisions.

The order entered today finds that, following the issuance of the November 2019 order, Goldman had additional recordkeeping failures, in violation of the cease-and-desist provision of the earlier order. Specifically, Goldman used a vendor service to record calls made on mobile devices. Beginning in March 2020, increased use of the vendor’s recording service during the pandemic led to increased failures in the vendor’s hardware. As a result, Goldman failed to fully record and retain thousands of mobile device calls. Goldman discovered the issue when investigating reports of poor call quality from employees using the recording service. An interim fix was implemented in May 2020, and the vendor’s hardware was replaced with an alternative system in September 2020. 

Separately, beginning in March 2020, Goldman began using software from another vendor that was designed to replicate the experience of a hard-wired trading turret—a specialized phone setup used to facilitate trading—via a computer. In late May 2020, Goldman discovered a software issue where the system sometimes failed to properly record audio. As a result, Goldman failed to fully record and retain thousands of calls. After implementing an interim fix, a permanent fix in the form of a software update was completed in June 2022.

The CFTC August 2023 Order found that Goldman had violated the cease-and-desist provision of a prior order and committed recordkeeping violations in connection with its failure to properly record and retain certain audio files; and the company was required to pay a $5.5 million civil monetary penalty and to cease and desist from further violations of the recordkeeping provisions of the Commodity Exchange Act and CFTC regulations. Y'all think that a smaller firm or individual would have gotten off as lightly as Goldman in response to a regulator's finding that such a respondent had "violated the cease-and-desist provision of a prior order"? 

Notwithstanding the second-bite-of-the-apple nature of Goldman's alleged misconduct, CFTC Commissioner Caroline Pham dissented from the Order, citing her concerns that the unprecedented impact of Covid placed impediments in the path of Goldman's effective compliance: CFTC Commissioner Caroline Pham dissented from the CFTC Order https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement082923b In her Dissent, Commissioner Pham opined that:

I respectfully dissent from the order and settlement in the administrative proceeding In re Goldman Sachs & Co. LLC, because I believe that this enforcement action is fundamentally unfair, unjust, and does not best serve the public interest.  Based on my review of the record, I believe that this enforcement action is wrong—we are not doing the right thing here on vendor issues arising out of the unprecedented move to remote work because of the COVID-19 pandemic, and I cannot support it.

Regulation by enforcement has a darker counterpart. This order and settlement reflects the Commission’s disturbing trend of “examination by enforcement”—where the Division of Enforcement imposes a disproportionately high civil monetary penalty for one-off, non-material operational or technical issues with no misconduct, harm to clients, or financial losses, and that every other major regulatory authority addresses through an examination program conducted by supervisory staff (i.e., examiners).

By taking this approach, the CFTC is an outlier amongst U.S. and non-U.S. regulators.  It does not best serve the Commission’s mandate to provide oversight of market participants, and it does not meaningfully contribute to market integrity. Examination by enforcement is inherently ad hoc, not applied consistently across market participants, and does not provide a horizontal view to inform the Commission of potential systemic risk. 

I respect -- even if grudgingly -- Commissioner Pham's arguments. She is right to admonish the regulatory community about the compromises forced upon the industry in response to the unique challenges presented by Covid. Compliance Departments were forced to make it up as they went along during the pandemic -- and that at a time when living-and-breathing humans weren't showing up to the office as the scourge ran rampant. In fact, as the pandemic unfolded, I urged the regulatory community to consider the challenges forced upon the industry's men and women; See:

Like I said, I appreciate Commissioner Pham's Dissent. On the other hand, I celebrate the Dissent of CFTC Commissioner Kristin N. Johnson: Statement of Commissioner Kristin N. Johnson Regarding Effectively Calibrating CFTC Civil Money Penalties to Deter Repeated Compliance Failures"
https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement082923 In pertinent parts, Commissioner Johnson admonishes that:

This is not the first time the Commission has resolved claims related to a failure to maintain audio recordings with this firm.  As noted above, in 2012, the Commission adopted the swap dealer recordkeeping requirements.  Several years later, Goldman was unable to produce to the CFTC DOE, in the course of an unrelated investigation into Goldman’s conduct, audio recordings from dates in 2014.

. . .

The resolution announced today—a $5.5 million penalty—represents less than one half of one percent of the net income that The Goldman Sachs Group, Inc., of which Goldman is a material subsidiary, reported solely for the second quarter of 2023.[4] Put differently, the civil monetary penalty imposed today is quite literally less than the profit Goldman can earn by the end of the day today.

. . .

Reliance on third- and fourth-party service providers is not a defense for regulatory violations and offers no absolution for repeat failures to comply with statutory and regulatory obligations, including those that are fundamental to the effective execution of the Commission’s mission.

FINRA September 2023 Goldman Settlement

On September 22, 2023 (the same day that the SEC announced its settlement with Goldman), FINRA also entered into a settlement with Goldman: In the Matter of Goldman Sachs & Co. LLC, Respondent (FINRA AWC 2019061945001 / September 22, 2023)
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 part the AWC's "Background" asserts [Ed: footnote omitted]:

In June 2014, Goldman entered into AWC No. 2013037230001, in which FINRA found that Goldman violated FINRA and SEC blue sheet rules and failed to have in place an adequate audit system for its blue sheet submissions as required by SEC rules. In particular, FINRA found that Goldman misreported certain sales in at least 692 blue sheets submitted to the SEC and FINRA between November 2010 and June 2012 and  submitted an undetermined number of inaccurate blue sheets between 2004 and October  2010. In addition, FINRA found that between November 2012 and January 2013,  Goldman omitted certain sell-side transactions from at least 53 blue sheets submitted to  FINRA. Goldman agreed to pay a fine, which was reduced to $1 million in light of the  firm’s cooperation, and to certify that the firm reviewed, and revised as necessary, its  policies, systems, and procedures relating to the relevant blue sheet deficiencies.  

In June 2010, Goldman entered into AWC No. 2009016818501, in which FINRA found that from February to May 2009, Goldman violated FINRA’s blue sheet rules and supervisory rules by providing 36,852 blue sheet submissions that failed to include the ticker symbol for transactions. Goldman agreed to pay a $22,500 fine and to revise its  written supervisory procedures to address the relevant deficiencies.

In January 2006, the New York Stock Exchange issued a decision in Case No. 05-145, where it found that Goldman Sachs violated NYSE rules relating to the submission of electronic blue sheets. The NYSE held that Goldman failed to establish and maintain appropriate systems and procedures to supervise and control its electronic blue sheet reporting. The firm agreed to pay a fine of $150,000 and to conduct a validation of all required blue sheet data elements.

In accordance with the terms of the AWC, FINRA imposed upon Goldman a Censure, a $6 million fine, and an undertaking to remediate the issues cited.The AWC alleges in its "Overview" that [Ed: footnote omitted]:

From at least November 2012 through March 2022, Goldman submitted almost 25,000 blue sheets to FINRA that inaccurately reported one or more of 39 separate types of transaction information. In those FINRA blue sheets, Goldman failed to include required transactions or transaction information, or included incorrect information for at least 97 million transactions. Therefore, Goldman violated FINRA Rules 8211, 8213, and 2010. Goldman also failed to establish and maintain a supervisory system reasonably designed to achieve compliance with FINRA and SEC blue sheet requirements in violation of FINRA Rule 3110, NASD Rule 3010, and FINRA Rule 2010.

Absent from FINRA's September 2023 AWC is any assertion that Goldman had provided so-called "extraordinary cooperation" during the self-regulatory-organization's investigation. How could that be? In the SEC September 2023 Order, that regulator noted that it had "considered remedial acts undertaken by Respondent and cooperation afforded the Commission staff." Notably, pointedly, the AWC presents Goldman's prior history of relevant misconduct -- so this was not Goldman's first rodeo with FINRA and the firm was clearly on notice of a need to cooperate -- more than merely go through the motions, in fact, but to provide extraordinary cooperation to the self-regulatory-organization. Notably, pointedly, Goldman was actively dealing with the SEC and the CFTC contemporaneous with its interactions with FINRA -- so each of the three regulators should have demanded and insisted that the firm provide extraordinary cooperation so as to facilitate the conclusion of the multiple investigations and settlements. Notably, pointedly, Goldman's General Counsel sits on FINRA's Board of Governors -- but that disclosure does not appear in the September FINRA  AWC and the firm's "extraordinary cooperation" is not noted, which implies that it did not occur.

A few months ago, in another FINRA AWC settlement involving Goldman, I stated in part in "In 2023 FINRA Settles With Goldman Sachs Over Mismarked Short Sales Dating Back To 2015 (BrokeAndBroker.com Blog / April 5, 2023)"

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)  
https://www.finra.org/media-center/newsreleases/2021/finra-board-appoints-deborah-bailey-and-kathryn-ruemmler-newest. 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.

As alleged in FINRA's April 2023 AWC (some five months ago -- before the September 2023 AWC alleging ), Goldman submitted almost 25,0000 inaccurate Blue Sheet reports involving some 39 transaction types and at least 97 million transactions  during 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020, 2021, and 2022 (as I noted at the beginning of this article, setting out each year looks much worse but is far more effective in conveying the extended nature of the misconduct).


Apparently, Goldman's prior wrongs just don't matter. Not to the SEC. Not to the CFTC. Not to FINRA. Modern day regulation of Wall Street's Big Boys provides an express check-out line. The regulator rings up the charges. The likes of Goldman pay the bill. Not much in the way of pain or remediation. Pretty much a cost-benefits analysis. All of which explains my call to boycott FINRA elections as a way to demand overdue reform. All of which makes it despicable for FINRA to refuse to make its Board elections transparent by timely releasing the vote tally inclusive of abstentions. All of which makes it shameful for FINRA's individual Board members to remain silent in the face of the self-regulatory-organization's nondisclosure.



Testimony Before the United States House of Representatives Committee on Financial Services by SEC Chair Gary Gensler

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