Recently, a $9.8 million settlement by Goldman Sachs Group Inc. (GS) related to a Ponzi scheme was approved by a federal judge, according to a report in the Wall Street Journal.
The settlement, in particular, was reached by Goldman’s clearing and execution division and the Ponzi scheme refers to that of Arthur Nadel's, unraveled following the financial crisis. Notably, Arthur Nadel’s Scoop Management Inc. and related funds suffered losses of $168 million for investors prior to the scheme’s discovery in 2009. Currently, Nadel is serving a 14-year prison sentence for it.
Last December, Goldman reached a settlement with the receiver and has now been approved by the federal judge. Goldman did not admit to any wrong doing but it was linked with the scam as its affiliate, Shoreline Trading Group LLC, a broker-dealer, cleared Nadel’s trade through Goldman.
Notably, Wachovia, which was taken over by Wells Fargo & Co. (WFC), is also being sued by the receiver in the Nadel suit. Wachovia has been accused of allowing Nadel to create secret accounts to channel investors fund from the hedge funds to his own accounts.
Post the financial crisis, the dealings between clearing banks and customers have been a matter of extreme scrutiny by regulators. In fact, last year, Goldman revealed that its clearing unit confronted possible civil fraud charges by the Commodity Futures Trading Commission. Goldman faced allegations over whether it had knowledge that a customer was making use of other customer accounts instead of ones own money in transactions with Goldman.
In addition, Goldman is facing a $20.5 million arbitration award related to its clearing broker profile for the hedge fund Bayou Group LLC. The company has been accused of ignoring fraud signs at the fund prior to its failure in 2005.
As a matter of fact, Goldman is limiting its association with small brokers. Over the last two years, the company reduced their count to six from over two dozen earlier. The approval of the settlement brings some sort of relief to Goldman as it reduces the company’s litigation overhang and it is freed from any further allegations.
Goldman’s recent expansions to generate revenue growth, coupled with targeted cost reduction initiatives, are impressive. Strategic efforts to reduce litigation headwinds are also encouraging.
While Goldman is expected to benefit from its well-managed global franchise, strong capital base and recent investments, the regulatory issues including lawsuits coupled with fundamental pressure on the banking sector, are expected to dent the financials of the company in the upcoming quarters.
Goldman shares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating.
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