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Financial Arbitration Award Upheld in Goldman Sachs Case

Monday, July, 9, 2012

Goldman Sachs was told that yes, indeed, it must pay the $20.5 million award ordered by a financial arbitration board in 2010. The order came from the United Sates Court of Appeals, Second Circuit.

Original Legal Arbitration & Award


The Second Circuit of the United States Court of Appeals upheld the ruling on Tuesday, July 3, 2012.


The original financial arbitration decision was awarded in 2010, two years after Bayou Group filed its claim against the investment & securities firm. Goldman Sachs cleared numerous trades for Bayou Group before it collapsed in 2005.


The $20.5 million was awarded to creditors of Bayou Group, a hedge management fund whose former chief executive is currently in prison for fraud.


The Bayou creditors' committee filed for arbitration with Goldman Sachs in 2008. Creditors claim that Goldman helped Bayou helping fund and perpetrate a Ponzi scheme.


Former CEO of Bayou Group, Samuel Israel III, is currently serving out a 20 year fraud sentence. He entered a guilty plea on counts of misrepresenting funds, as well as defrauding his clients of nearly half a billion dollars.

How Does Goldman Sachs Fit In--and What Does This Mean for Other Firms?


While neither Goldman Sachs, nor any of its executives or employees were charged with fraud, the investment firm was still implicated in the case. Goldman maintained that it should not be held at all liable, claiming that its job is only to process the transactions, and not to police its clients. It appealed the 2010 award, arguing that the original arbitrators showed a manifest disregard for the law in this case.


The United States Court of Appeals disagreed. Why? Perhaps it suspected that someone at Goldman Sachs knew what Israel was running at Bayou, and didn't care. Or perhaps the court simply wants Wall Street to better police itself.


In any case, this sends a loud and clear message to other investment firms on Wall Street: If in the future they deal with excessively shady clients, financial and/or legal arbitration may not be in their favor in the future.