Goldman Sachs has agreed to pay $15 million to settle charges it failed to perform adequate review of securities that customers had asked it to “locate” for short sales.
Federal regulations bar brokerages from accepting short sale orders unless they have borrowed the security, entered into a bona fide arrangement to borrow the security, or have “reasonable grounds” to believe they can borrow the security so it can be delivered on the delivery date.
Between 2008 and 2013, Goldman used an automated system to review and fill customers’ requests to locate securities for short sales. But according to the SEC, that system was inadequate because it allowed the securities lending desk to grant locate requests based on the inventory reported to Goldman early in the day by other large financial institutions, even after the inventory had been depleted as the desk processed requests during the day.
“The requirement that firms locate securities before effecting short sales is an important safeguard against illegal short selling,” Andrew J. Ceresney, director of the SEC’s Enforcement Division, said in a news release. “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.”
Goldman agreed to resolve the SEC’s allegations without admitting or denying the findings. “We are pleased to have resolved this matter with the SEC,” a spokesman said.
According to the SEC, the number of locate requests handled by the securities lending desk’s “demand team” reached more than 20,000 per day. Since the volume was more than the team could process manually, they relied on a function of Goldman’s order management system referred to as “fill from autolocate,” which was activated by the “F3” key on their computer keyboards.
“In processing locate requests using the ‘F3’ function, the demand team typically did not check alternative sources of securities or perform a meaningful further review,” the SEC said in an administrative order. “Instead, they relied on their general belief that Goldman’s automated model was conservative and that the provision of additional locates would not result in failures to deliver the securities if and when due for settlement.”