December 7, 2012
While I concur in the terms of the settlement in this matter with regard to the findings of violations, the undertakings to improve deficient compliance systems and procedures, and the imposition of a cease and desist order, I respectfully dissent as to the amount of the civil monetary penalty (CMP). In this instance, given the egregious nature of the failure to supervise adequately, combined with the high number of violative transactions, I believe that the monetary penalty should be significantly higher in order to represent a sufficient punishment, as well as to denote a meaningful deterrent to future illegal activity.
Approximately 60 times over seven days in mid-November and mid-December 2007, a Goldman, Sachs and Co. (“Goldman”) associated person (the “Trader”) used Goldman’s internal manual trade entry system to enter fabricated trades for e-mini S&P 500 futures transactions. Entering these fictitious trades concealed and misrepresented the size, risks, profits, and losses of Goldman’s position. Goldman’s failure to supervise diligently the Trader’s activities enabled him to amass an $8.3 billion position, and Goldman ultimately incurred losses of over $118 million unwinding these transactions.
Commission Regulation 166.3 mandates diligent supervision. The principle underlying this rule is that the public interest is furthered by minimizing operational risks. Individual failures to supervise can lead to or contribute to broader economic risks, and can lower public confidence in the nation’s financial markets. The importance of this rule has only increased since the onset of the financial crisis. Accordingly, I believe we must take very seriously any violation of this important rule, and assess penalties for its violation at a level commensurate with the unlawful conduct.
The Commodity Exchange Act provides the Agency with authority to prosecute violations “of any provision of this Act or of the rules [. . .],” and to request CMPs “for each such violation.” 7 U.S.C. Section 9(c). These penalties should be calculated so that they are more than a “slap on the wrist” or a "cost of doing business." Given that Goldman failed diligently to supervise the activities of the Trader approximately 60 times, and that, under the maximum penalty levels in effect at the time of these failures ($130,000 per violation), the starting point for assessing the CMP in this matter should be $7.8 million (60 x $130,000). I do not believe the $1.5 million CMP in this settlement is anywhere close to an amount representing a sufficient penalty or deterrent.
The Commission should have clear authority to levy meaningful CMPs. In that vein, I have called on Congress to provide unambiguous statutory authority to permit broad discretion in the interpretation of “each such violation,” and also to significantly increase our maximum penalty levels. Specifically, we need the unequivocal authority to assess penalties appropriate to timing and conduct—for every single statutory or regulatory violation, on a per second, per hour, or per day basis, as may be apposite to each individual prosecution. Additionally, our statute should be amended to increase maximum penalty levels to $250,000 per violation as to individuals and $1 million as to entities. In instances of market manipulation, the maximum penalty levels for individuals should be $1,000,000 per violation and increased to $10,000,000 for entities.
Furthermore, I believe the Commission should amend its current policy statements relating to imposition of CMPs. First, we should specifically include as an assessment factor the risk that the illegal conduct poses to any person, group of persons, or to market integrity generally. Violations that threaten significant risk of harm to customers or markets should be subjected to higher CMPs. Consequently, a failure to supervise diligently should incur much more significant penalties when such failure jeopardizes customer money or the financial health of an important institution. Second, the Commission should modify its policies to clarify what “each such violation” means. In the case of Commission Regulation 166.3, the Commission should clarify that each instance in which prohibited activity took place constitutes a separate violation.
Last Updated: December 7, 2012