SEC Settles Charges With Goldman Sachs Over Violated Lending Practices

Banking, finance, and taxes

Published: January 15, 2016 1:05 pm

Last Updated: January 13, 2020 2:58 pm

The U.S. Securities and Exchange Commission (SEC) announced that Goldman Sachs Group Inc. (NYSE: GS) agreed to pay $15 million to settle charges that its securities lending practices violated federal regulations.

The SEC found that when Goldman Sachs employees used a “locate” function to grant requests, they relied on their general belief that their automated model was conservative and the granting of additional locates would not result in failures to deliver when the securities became due for settlement. In the process, the Goldman Sachs employees did not check alternative sources of inventory or perform an adequate review of the securities to be located.

According to the SEC’s report:

Broker-dealers such as Goldman Sachs are regularly asked by customers to locate stock for short selling. Granting a “locate” represents that a firm has borrowed, arranged to borrow, or reasonably believes it could borrow the security to settle the short sale. The SEC finds that Goldman Sachs violated Regulation SHO by improperly providing locates to customers where it had not performed an adequate review of the securities to be located. Such locates were inaccurately recorded in the firm’s locate log that must reflect the basis upon which Goldman Sachs has given out locates.

Also the order found that when SEC examiners questioned the firm’s securities lending practices during an examination in 2013, the investment bank provided incomplete and unclear responses that adversely affected and unnecessarily prolonged the examination.

Andrew J. Ceresney, director of the SEC’s Enforcement Division, commented:

The requirement that firms locate securities before effecting short sales is an important safeguard against illegal short selling. Goldman Sachs failed to meet its obligations by allowing customers to engage in short selling without determining whether the securities could reasonably be borrowed at settlement.

Andrew M. Calamari, director of the SEC’s New York Regional Office, added:

SEC exams ensure that market participants are following the rules, so there will be consequences, including in the determination of remedies, when a registrant fails to provide complete and clear responses to examination staff.

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