Goldman Sachs & Co. today was ordered by the Commodity Futures Trading Commission to pay $1.5 million for failing to diligently supervise a trader who hid an $8.3 billion trading position - a penalty that one agency commissioner said was far too low.
According to the CFTC, former Goldman trader Matthew Marshall Taylor in November and December 2007 "circumvented Goldman's risk management, compliance, and supervision systems" by entering fabricated sell trades of a stock market index future contract.
About 60 times, Taylor allegedly used Goldman's internal manual trade entry system to log fake e-mini S&P 500 futures transactions on the Chicago Mercantile Exchange Globex electronic trading platform. The phony sell trades "artificially offset and thereby camouflaged e-mini S&P 500 buy trades the Trader had executed in the market," according to the CFTC administrative order.
Ultimately, Goldman took a $118 million loss to unwind Taylor's position (Taylor was trading for a firm trading account – there were no customer losses). Still, it pales next to the $6.2 billion loss suffered by JP Morgan Chase in April in connection with trades by the so-called London Whale.
CFTC Regulation 166.3 requires companies to diligently supervise their employees by "establishing, implementing and executing an adequate supervisory structure and compliance programs." According to the CFTC, Goldman violated this duty by failing to set up procedures that would have prevented an employee from entering fabricated trades.
CFTC Commissioner Bart Chilton in a statement concurred that it was appropriate to find a violation, but dissented on the $1.5 million fine, which he wrote was not "anywhere close to an amount representing a sufficient penalty or deterrent."
"In this instance, given the egregious nature of the failure to supervise adequately, combined with the high number of violative transactions, I believe that the monetary penalty should be significantly higher in order to represent a sufficient punishment, as well as to denote a meaningful deterrent to future illegal activity," wrote Chilton, a Democrat who was appointed by President George W. Bush in 2007 and reappointed by Barack Obama in 2009.
Chilton wrote that the "starting point" for a penalty should have been $7.8 million, based on 60 violations with a maximum fine of $130,000 per violation. "These penalties should be calculated so that they are more than a 'slap on the wrist' or a 'cost of doing business,'" he wrote.
The settlement does not contain boilerplate language that the accused neither admits nor denies the allegations – language that proved so unpopular with New York federal judge Jed Rakoff when he refused to approve a settlement between the U.S. Securities and Exchange Commission and Citigroup last year.
The CFTC settlement specifically bars Goldman from making "any public statement denying, directly or indirectly, any findings or conclusions in this Order, or creating, or tending to create, the impression that this Order is without a factual basis."
Goldman Sachs spokesman Michael Duvally in an emailed statement said that "Taylor's activity was flagged by our controls on December 14, 2007 with no impact to customer funds. After initially providing false explanations during the trading day, Taylor admitted his conduct following market close and was subsequently terminated. Since these events, we have enhanced our controls. We’re pleased to have settled this matter."