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Goldman Sachs Appeals Bayou Group’s $20.5 Million Arbitrage Award

According to the Wall Street Journal, Goldman Sachs Group, Inc. is fighting a $20.5 million arbitration award that “stems from Goldman’s role as a clearing broker for a failed hedge fund,” the Bayou Group. Specifically, the creditors of Bayou Group LLC “accused Goldman Sachs Execution & Clearing LP of ignoring signs of fraud at the hedge fund run by Samuel Israel III before it imploded in 2005.”

Goldman Sachs Group Inc (NYSE:GS)

Bayou Group Creditors vs. Goldman Sachs

GS’s argument is that the “Financial Industry Regulatory Authority arbitration panel that awarded the sum ignored the law.” The panel, known as “Finra,” awarded the $20.5 million to Bayou Group Creditors LLC, the opposing side, in June 2010. GS sued to vacate the award but Federal Judge Jed Rakoff upheld the ruling and confirmed the arbitration award in November. GS filed its appeal to the ruling on Thursday. The Wall Street industry group Securities Industry and Financial Markets Association (SIFMA) showed support for GS during the trial and the Wall Street Journal reports that a spokesman for the group has confirmed that it will “file a brief in support of Goldman in the appeal.”

SIFMA Says Wall Street Will Be Impacted in Arbitration Ruling Against Goldman Sachs Upheld

The Bayou Group was founded by Samuel Israel in 1996 and exposed as a fraud in 2005. Israel was convicted of scamming over $400 million and is currently serving a 22-year prison sentence for his involvement. GS was the “prime broker and clearing firm for Bayou from 1999 to 2005.” The creditors of Bayou Group are accusing GS of having ignored warning signs like suspicious money transfers and the way Israel shuffled money between accounts at GS. If the arbitration ruling is withheld, there wil be consequences for Wall Street in general.”In imposing liability on Goldman,” SIFMA explained in its court brief supporting GS, “the arbitrators disregarded the long-recognized principle that a clearing firm cannot be liable for merely processing transactions received from an authorized source.” It continued, “If clearing firms were required to analyze trading in introduced accounts, the speed and efficiency demanded in the contemporary securities markets would not be possible.”