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Goldman Sachs & Co. may be a wizard at making money, but its compliance operations left a lot to be desired. That’s the message Britain’s Financial Services Authority sent when it leveled a $27 million fine against Goldman Sachs International, Goldman’s London unit, for failing to alert the FSA earlier to the fact that the Securities and Exchange Commission was pursuing a serious investigation of Goldman’s controversial Abacus deals. (You can read Bloomberg’s story about the fine here.) The FSA, the United Kingdom’s equivalent of the SEC, explained the sanction in this 20-page “Final Notice” sent to Goldman Sachs International on Thursday. The agency said it accepted that Goldman did not deliberately withhold information from the FSA. Instead, it said, the company failed to have “proper and effective systems and controls in place” to let its U.K. compliance group know about regulatory investigations. Goldman should have considered alerting the FSA in February 2009, when Goldman employees were called to give testimony to the SEC, and it should have considered contacting the agency “at the latest” in July 2009, when Goldman got a Wells notice, the FSA stated. (The SEC sends Wells notices when its staff plans to propose an enforcement action.) As the FSA points out, this probe was relevant to GSI because GSI marketed the Abacus investments in the U.K. The agency was especially harsh on Goldman for not reporting the Wells notice received by employee Fabrice Tourre, who was working at GSI at the time of the probe. Goldman waited until April 16, the same date it was sued by the SEC for failing to disclose material information to potential Abacus investors, to contact the FSA. ( Goldman settled with the SEC in August for $550 million. Tourre continues to fight the charges.) The FSA points out that Goldman’s legal and compliance people in New York didn’t pass on the relevant information to the compliance group at GSI. It appears they didn’t believe the SEC’s probe would amount to much, according to what Goldman told the FSA. “The FSA understands that GSC did not believe that the SEC Investigation would conclude with an outcome that was material for the firm. After it received the GSC Wells Notice, GSC continued to believe either that it would be able to persuade the SEC staff not to proceed or that the matter could be settled on terms that would not be material, and that any resolution would at most involve only GSC (and not any individuals).” The FSA’s director of enforcement, Margaret Cole, is a former White & Case partner who has become known for making her agency more active and aggressive. We talked to one London lawyer at a major firm who was surprised by the size of the fine. “It’s very substantial for this type of activity,” the lawyer said. “[The FSA] seemed particularly exercised that it just didn’t cross anyone’s mind that there are English regulatory requirements. What really comes through is the FSA’s sense of frustration. It’s a pretty harsh penalty.” Although $27 million may not seem like a lot by U.S. standards, the lawyer said it’s quite a large penalty for the U.K. “It’s at the upper end, definitely.” (Our source agreed to discuss this matter only if we didn’t use the lawyer’s name or firm. Just try to find a major firm that doesn’t represent Goldman Sachs, or desire to.) The fine would have been even hirer — $38.6 million — if Goldman hadn’t qualified for the FSA’s early cooperator 30 percent discount. According to Bloomberg, this is the second largest fine ever imposed by the FSA. This same lawyer expressed surprise that Goldman’s legal and compliance group didn’t make these disclosures. “Knowing the compliance department at Goldman, it’s very sophisticated. I’m surprised it didn’t occur to anyone that there were U.K. regulatory issues.” Perhaps the SEC probe was viewed as so sensitive within Goldman that the company and its lawyers tried too hard to limit the circle of people who knew about it, the lawyer surmised. “I wonder if the sensitivity about these discussions [with the SEC] contributed to the right people not being as aware as they should have been.” A Goldman Sachs spokeswoman told Bloomberg that the company is pleased that the matter has been resolved. We contacted Sullivan & Cromwell’s Richard Klapper, who represented Goldman in the SEC matter, but did not hear back.

This article first appeared on The Am Law Litigation Daily blog on AmericanLawyer.com.

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