Goldman Sachs pays penalty to resolve short-selling rule violation

WASHINGTON - Goldman Sachs has agreed to pay US$450,000 ($625,200) to settle regulators' allegations that it violated a rule related to short-selling of stocks in 2008-09, it was announced yesterday.

The banking company did not admit or deny wrongdoing in paying the civil penalties in agreements with the Securities and Exchange Commission and the New York Stock Exchange's regulatory arm.

The case involving Goldman's stock-trading business is unrelated to the SEC's civil fraud charges filed against the firm last month over mortgage securities transactions it arranged.

Goldman has denied the allegations in that case and said it will contest the charges in court.

The rule in the short-selling case involves naked short-selling and was installed by the SEC at the height of the market distress in the fall of 2008.

Short-sellers bet against a stock, in a practice that is legal and widely used on Wall St.

They often borrow a company's shares in a short sale, sell them, and then buy them when the shares decline - pocketing the difference in price.

Naked short-selling occurs when sellers don't own or borrow the shares before selling them, and then look to cover positions sometime after the sale.

The SEC rule includes a requirement that brokers must promptly buy or borrow securities to deliver on a short sale.

In the case involving the brokerage subsidiary, Goldman Sachs Execution & Clearing, the SEC and the NYSE regulators alleged that it failed to procure shares to cover its customers' short positions in the time required.

The SEC also censured Jersey City, New Jersey-based Goldman Sachs Execution & Clearing in its administrative proceeding in the case.

Censure generally brings the possibility that the firm could face a stiffer sanction if the alleged infraction is repeated.

While Goldman neither admitted nor denied the allegations, it did agree to refrain from future violations of the short-selling rule.

"This was the result of a manual processing error following the change in" requirements under the short-selling rule, Goldman spokesman Ed Canaday said.

"There was no financial impact on our clients. We now have improved, automated processes in place to avoid future errors."

Under the rule, brokers acting for short sellers must find a party believed to be able to deliver the shares within three days after the short-sale trade. If the shares aren't delivered within that time, there is a "failure to deliver".

Brokers can be subject to penalties if the failure to deliver isn't resolved by the start of trading the following day.

- AP