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 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES ACT OF 1933
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In the Matter of GOLDMAN, SACHS & CO., Respondent.
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ORDER INSTITUTING PUBLIC ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, IMPOSING REMEDIAL SANCTIONS AND MONETARY PENALTIES, AND ISSUING A CEASE- AND-DESIST ORDER PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933 AND SECTIONS 15(b) AND 21C OF THE SECURITIES EXCHANGE ACT OF 1934 |
I.
The Securities and Exchange Commission (the "Commission") deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Goldman, Sachs & Co. ("Respondent" or "Goldman").
II.
In anticipation of the institution of these proceedings, Goldman has submitted an Offer of Settlement (the "Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, and without admitting or denying the findings, except as to the Commission's jurisdiction over it and the subject matter of these proceedings, which are admitted, Goldman consents to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings, Making Findings, Imposing Remedial Sanctions and Monetary Penalties, and Issuing a Cease-and-Desist Order Pursuant to Section 8A of the Securities Act of 1933 and Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below.
III.
FACTUAL FINDINGS
On the basis of this Order and Respondent's Offer, the Commission finds1 that: RespondentGoldman is an investment bank and broker-dealer with its principal place of business in New York, New York. Goldman's parent company's common stock is registered with the Commission pursuant to Section 12(b) of the Exchange Act and is listed on the New York Stock Exchange.
Other Relevant Entities
PetroChina Company Limited ("PetroChina") is a joint stock company with limited liability under the Company Law of the People's Republic of China. PetroChina was established on November 5, 1999 as a part of a restructuring of its parent, China National Petroleum Corporation ("CNPC"). CNPC, a large Chinese state-owned oil and gas corporation, is a controlling shareholder in PetroChina. Goldman served as an underwriter in connection with PetroChina's offering. PetroChina began trading publicly on the New York Stock Exchange and on the Hong Kong Stock Exchange on April 6, 2000.
China Telecom Hong Kong Limited ("China Telecom") is a company for which Goldman served as an underwriter in connection with its offering. China Telecom's registration became effective on October 27, 1999.
Chinadotcom Corp. ("Chinadotcom") is a company for which Goldman served as an underwriter in connection with its offering. Chinadotcom's registration became effective on January 19, 2000.
Gigamedia Limited ("Gigamedia") is a company for which Goldman served as an underwriter in connection with its offering. Gigamedia's registration became effective on February 17, 2000.
Summary
Goldman violated the federal securities laws in connection with four international public offerings for which the firm served as underwriter when certain sales traders on Goldman's New York Asian Shares Sales Desk (the "Desk") sent lengthy and detailed emails concerning the offerings to numerous institutional customers during the "waiting period," the period after a registration statement is filed but before the Commission declares it to be effective. In connection with one of these four offerings, a global, multi-billion dollar initial public offering by PetroChina, Goldman also violated the federal securities laws when, during the "pre-filing period", the period before the registration statement was filed, a senior Goldman representative (the "Senior Goldman Representative"), after obtaining clearance from Goldman senior managers and Goldman counsel, spoke to the press about PetroChina, and explained that the proceeds of the offering would be used in China, and not in Sudan. These actions are prohibited by Sections 5(b) and (c), respectively, of the Securities Act.
Section 5(b) of the Securities Act prohibits the making of written offers of securities (including by email) during the waiting period other than by means of a statutory prospectus. Goldman voluntarily reported one instance of illegal written offers by certain employees to the Commission staff. The Commission's investigation revealed that the same employees had engaged in similar conduct in connection with three previous offerings, and that Goldman's system for applying its procedures concerning written offers, and compliance with Section 5(b) of the Securities Act, was inadequate with respect to the Desk.
Under Section 5(c) of the Securities Act, during the pre-filing period, issuers and their representatives, such as Goldman, are prohibited from engaging in activities that could reasonably have the effect of arousing investors' interest in the issuer's securities. Goldman violated Section 5(c) of the Securities Act when, under the circumstances of this case, the Senior Goldman Representative spoke to the press on Goldman's behalf.
Goldman's Violation of Section 5(b) of the Securities
Act:
Illegal Written Offers During the Waiting Period
The Asian Shares Sales Desk
From October 1999 to March 2000, Goldman served as an underwriter in connection with at least four public offerings by Asian issuers, all of which were marketed to U.S.-based institutional customers by the Desk. During the time of the relevant offerings, the Desk consisted of between four and five salespersons, including the supervisors. All of these persons had spent significant time working in Asia.2 The purposes of the Desk included marketing and selling offerings by Asian issuers (excluding Japanese issuers) to U.S.-based institutions. The Desk began its sales efforts at the time a deal was "launched" by Goldman's Equity Capital Markets ("ECM") group. Members of the Desk understood that once a deal was launched, they could communicate with their customers about a deal, including trying to interest them in meeting with analysts about the deal and/or attending the road show. Each member of the Desk was responsible for certain customers.
During the relevant period, two members of the Desk shared direct supervisory responsibility for the Desk (the "Desk Supervisors"). In addition to supervising the Desk, each had direct coverage responsibilities for his own customers. The Desk Supervisors did not allocate supervisory duties between the two of them; both were available to answer questions from and provide guidance to the sales traders they oversaw. They were jointly responsible for supervising the day-to-day activities of the Desk. The Desk Supervisors worked in close proximity to the employees they supervised. The compliance function for the Desk was provided by two compliance officers for the International Shares Department (the "Compliance Officers"), of which the Desk was a part.
In connection with each of four public offerings, for PetroChina, China Telecom, Chinadotcom, and Gigamedia, certain members of the Desk sent emails, constituting written offers, to institutional customers during the waiting period. The Desk Supervisors were copied on some of the violative emails concerning each of these offerings, and each of them sent violative emails in connection with at least two of the offerings.
The PetroChina Offering
On February 28, 2000, PetroChina publicly filed its registration statement with the Commission. One day later, on February 29, 2000, Goldman "launched" the deal internally by distributing a sales memorandum marked "for Internal Use Only," and ECM and a research analyst briefed the sales force on the offering and informed the sales force it was free to contact customers. Later that day, one member of the Desk drafted and sent an email to dozens of institutional customers regarding the PetroChina offering. The email contained details about the offering, the company, and China's oil and gas industry, including information not contained in the registration statement. It described the PetroChina offering as "China's most ambitious attempt to restructure its system of [State Owned Enterprises] yet." The email provided projections of, among other things, earnings growth and net income. The email included a section entitled "SIZE DOES MATTER (impact on indices & benchmarks)," which described PetroChina as the "LARGEST producer of crude oil & natural gas," "one of the Largest companies in China by revenues," and "the World's 4th largest listed oil company in terms of proved reserves & production." It also included a section called "WHY YOU SHOULD TAKE A GOOOOOOOD LOOK AT PETROCHINA?," which characterized PetroChina as "A restructuring story," "A cost cutting story," "A growth story," and "A Defensive/Value play." The individual who drafted the email copied it to the other Desk members, including the Desk Supervisors.
Upon receiving the email, three Desk members, including one of the Desk Supervisors, modified it slightly and sent versions of it to many of their own customers and also to various Goldman colleagues. The PetroChina emails sent to such customers were written offers that did not satisfy the requirements of Section 10 of the Securities Act. Under Section 10, any such written offers must contain virtually all of the information required in a prospectus and filed as part of a registration statement. The PetroChina emails were, therefore, illegal written offers during the waiting period.
An individual in Goldman's ECM group received a copy of the email as a "cc" and recognized the email as problematic. The ECM employee contacted the Desk and told one of the Desk Supervisors that the email should not have been sent and would have to be reported to the Compliance Department ("Compliance"). Based on the call, this Desk Supervisor instructed the other members of the Desk not to send the email to anyone else and to recall the emails that had been sent.
Later in the day, a meeting was held among employees of ECM, Compliance, Legal and the Desk. At the meeting, the members of the Desk asked why they had not previously been told that written communications like the PetroChina email were prohibited. Also at the meeting, it was decided that the emails should be electronically recalled, to the extent possible, and that a new email should be sent to all recipients instructing that they disregard the previous email because it was sent in error. Recipients also were to be contacted by phone with the same message.
In the days following February 29, one of the Desk Supervisors received calls from various Goldman senior managers impressing upon him the seriousness of the incident and asking how it could have occurred. This Desk Supervisor told the callers he had understood that communications like the PetroChina email were permissible.
Goldman's Disclosure to the Division of Corporation Finance
On March 2, 2000, counsel for Goldman informed the Division of Corporation Finance ("Corporation Finance") about the PetroChina emails. On March 10, Corporation Finance requested that PetroChina amend its registration statement to include disclosure concerning the emails. In response, PetroChina submitted to Corporation Finance disclosures that included a version of the email text annotated to disclose and correct factual errors contained in the emails. Subsequently, on March 29, Corporation Finance declared the PetroChina registration statement effective, and trading in PetroChina's stock began on the New York Stock Exchange on April 6, 2000.
Following Goldman's disclosure to Corporation Finance concerning the PetroChina email, the Commission commenced an investigation of Goldman. The investigation revealed that the PetroChina offering was not the first time the members of the Desk sent improper emails to institutional customers in violation of Section 5 of the Securities Act. In fact, it revealed that they sent similar emails on prior occasions, as set forth below.
The China Telecom Hong Kong Limited Offering
On October 4, 1999, China Telecom filed a Form F-3 registration statement with the Commission. Goldman served as an underwriter in connection with the China Telecom offering. China Telecom's registration statement became effective on October 27, 1999. During the waiting period, two members of the Desk sent violative emails to institutional customers regarding the China Telecom offering. One of these individuals copied the Desk Supervisors on an email sent to customers.
One member of the Desk sent an email, dated October 12, 1999, to approximately 90 contacts at various institutional customers of Goldman, with the subject line "China Telecom - Why you should own the name?" The email included background on the issuer, a section entitled "Why You Should Own the Stock", and a table comparing the issuer's valuation with various industry averages.
The Chinadotcom Corp. Offering
On January 6, 2000, Chinadotcom filed a Form F-1 registration statement with the Commission. Goldman served as an underwriter in connection with the Chinadotcom offering. Chinadotcom's registration statement became effective on January 19, 2000. During the waiting period, four members of the Desk, including the Desk Supervisors, sent violative emails to institutional customers regarding the Chinadotcom offering. One member of the Desk copied the Desk Supervisors on an email sent to such customers.
On January 10, a member of the Desk sent his customers emails that included a section on "Why You Should Own the Stock?" On January 12, he sent an email to an institutional customer that included "Reasons to own Chinadotcom."
On January 11, 2000, one of the Desk Supervisors sent an email with the subject line "Chinadotcom deal details" to approximately 20 contacts at approximately 15 institutional customers.
On January 14, 2000, another member of the Desk sent an email concerning Chinadotcom to dozens of institutional customers, and to Desk colleagues, including the Desk Supervisors. The email attached a "MUST READ table," entitled "The Market vs. Chinadotcom," which described "what Chinadotcom has today (4 business segments) and how each of its businesses stacks up against its major competitors worldwide, with COMPREHENSIVE STATISTICS that will help you understand the size of the internet world from a GLOBAL perspective."
The Gigamedia Limited Offering
On February 2, 2000, Gigamedia filed a Form F-1 registration statement with the Commission. Goldman served as an underwriter in connection with the Gigamedia offering. Gigamedia's registration statement became effective on February 17, 2000. During the waiting period, five members of the Desk, including the Desk Supervisors, sent violative emails to institutional customers regarding the Gigamedia offering. One member of the Desk also copied an email sent to such customers to the Desk Supervisors.
On February 3, 2000, a member of the Desk sent an email concerning Gigamedia to more than 40 contacts at institutional customers. The email included sections entitled "How Do They Make $$$$$$$$" and "Strengths." The next day, another member of the Desk sent an email that provided "company highlights" to 19 contacts at institutional customers.
On February 11, 2000, one of the Desk Supervisors sent an email to a contact at an institutional customer, which noted, "As you have probably heard the deal is red hot with the US$140 mn deal multi-covered even before the roadshow kicks off."
Disciplinary and Remedial Actions by Goldman
Goldman formally reprimanded all the employees involved, orally and in writing. Specifically, in September 2000, Goldman issued disciplinary memoranda to the Desk Supervisors and three other members of the Desk. The five members of the Desk who were disciplined also had their conduct taken into consideration in their careers at Goldman, including in setting discretionary bonuses, resulting in adverse adjustments ranging from $10,000 to $25,000 each.
After Goldman learned of the violative emails relating to PetroChina and the other offerings referred to above, Goldman adopted and implemented mandatory, enhanced training on the requirements of Section 5, including its application to the use of email in registered offerings. Goldman also has enhanced its compliance procedures for surveillance of external emails.
The Compliance Function
The Desk Supervisors worked with the Compliance Officers on compliance-related issues, and relied on them to provide guidance on such issues. The Desk Supervisors did not personally conduct compliance-related monitoring of the individuals they supervised.
The Compliance Officers provided compliance support for the International Shares Department, including the Desk, which comprised approximately 160 people. They had the assistance of two junior staff. The Compliance Officers held annual compliance training sessions for the Desk, among other desks, in 1999 and 2000.
In the 1999 compliance training session, one of the Compliance Officers covered, among other things, (1) Correspondence with Clients/Use of Email, and (2) Syndicate/Restricted Issues. For agenda item 1, she conveyed that email was subject to the same restrictions as written correspondence, including that it could be sent to fewer than ten customers and should contain a general disclaimer. During discussion of agenda item 2, she noted that during the offering period, only the deal calendar could be sent to customers via email. In addition, without specific reference to email, she generally indicated that highlights or extracts from the prospectus could not be sent to customers. In hard copy, only the entire prospectus could be sent to customers. The compliance officer did not distribute any handouts memorializing the information covered during the training session.
Based on the training session, the members of the Desk had differing impressions of their compliance obligations, but none of them understood that sending emails like the PetroChina emails was prohibited. One of the Desk members apparently did not attend the session.
No written compliance materials specifically relating to use of email in public offerings were distributed to the Desk prior to February 29, 2000, the date the PetroChina emails were sent. Prior to February 29, 2000, the relevant compliance officer was not familiar with any written policy describing when or in what manner it was permissible to contact customers during a registered offering. During this period, although written policies on communications during registered offerings existed generally at Goldman, the members of the Desk did not receive the policies, or adequate training on such policies.
The compliance training received by members of the Desk regarding communications with customers during a public offering and/or use of email to communicate with customers was inadequate and did not effectively convey the restrictions imposed by Section 5 of the Securities Act.
Goldman's Violation of Section 5(c) of the Securities Act: Conditioning the Market During the Pre-Filing PeriodBackground
PetroChina is a subsidiary of CNPC, a state-owned entity. Its connection to CNPC placed it at the center of a politically sensitive fight concerning religious freedom and human rights. Specifically, members of Congress, the Congressionally-created Commission on International Religious Freedom, labor unions and public interest organizations launched a vocal campaign prior to the offering to block the PetroChina offering because of CNPC's investment in an oil project in Sudan. This campaign included intense criticism of Goldman and its role in the offering. Sudan is subject to sanctions by the U.S. government related to human rights abuses. While these sanctions prevent U.S. companies from doing business with Sudan, they did not preclude PetroChina from accessing U.S. capital markets. Opponents of the offering feared that a portion of the proceeds raised in the PetroChina offering would be funneled to the parent company and, from there, contributed to the Sudanese venture.
Goldman's Statements to the Press
In response to criticisms of the offering and Goldman's planned role in it, and to defend the firm's reputation, certain Goldman senior representatives, who were not part of the investment banking unit or PetroChina transaction team, decided that the Senior Goldman Representative should respond to certain press inquiries concerning the PetroChina offering.
Goldman representatives consulted Goldman's legal counsel as to whether the Senior Goldman Representative could tell the press that PetroChina was a domestic-only Chinese oil company and that firewalls would be in place to prevent any of the proceeds of the offering from being used outside China. Goldman's counsel advised that these comments were permissible, but cautioned that nothing should be said about the specifics of the transaction, PetroChina's prospects as a business, or its merits as an investment.
In late 1999, Goldman representatives approached the Senior Goldman Representative about responding to the press concerning the objections to the PetroChina offering and criticism of Goldman's role in it. After requesting, and receiving, assurances that Goldman's counsel had approved such communications, the Senior Goldman Representative responded to four inquiries from the press.
On January 14, 2000, the Asian Wall Street Journal ran an article on the PetroChina offering entitled "PetroChina Seeks to Break With Past as Listing Nears." The article described the company, the planned offering, Goldman's role as an underwriter, and the controversy surrounding PetroChina's parent company's investment in Sudan. The article quoted the Senior Goldman Representative, stating "Sudan should not be an issue because of extensive legal firewalls in place to ensure that IPO proceeds are used domestically in China."
The January 24, 2000 edition of Business Week magazine included an article on the PetroChina offering entitled "Can This Giant Fly on Wall Street; China's Revamped Oil Company Hopes to Raise $5 Billion." The article described the planned offering, Goldman's role as underwriter, and the controversy surrounding PetroChina's parent company's investment in Sudan. The article also quoted the Senior Goldman Representative: "It's not an issue because of the extraordinary steps the company is taking to ensure IPO proceeds are only used domestically."
Three days later, on January 27, 2000, the Washington Post ran an article on religious and human rights groups' campaign to block PetroChina's listing on the New York Stock Exchange entitled "Chinese Fought on NYSE Listing; Groups Cite Oil Firm's Role in Sudan." The article, which reported that Goldman would serve as lead underwriter, included a quote from the Senior Goldman Representative, stating: "The structure of the deal emerging should mean that Sudan is not an issue because of the safeguards ensuring all the funds raised here will be used domestically. PetroChina will be a purely domestic company."
The same day the article appeared in the Washington Post, Corporation Finance contacted PetroChina's counsel requesting an explanation of why the comments had appeared in the press. Following this incident, Corporation Finance requested that PetroChina add to its registration statement disclosure concerning the Sudan issue, which had not been mentioned in prior drafts. Such language was included in the final registration statement.
On February 13, 2000, the Los Angeles Times published an article on the PetroChina offering entitled "Curbs Urged on Foreign Firms' Wall Street Access Globalization: Critics Want to Block Companies With Questionable Ties to Rogue Nations From Raising Money in U.S. Stock and Bond Markets." After referring to "legal 'firewalls'" and Goldman's role as the "lead investment bank" on the deal, the article quoted the Senior Goldman Representative as stating: "No one is saying there aren't problems there [in Sudan]. But . . . this particular transaction should not be affected by concerns about Sudan or other parts of the world."
In each of these instances, when the Senior Goldman Representative spoke to the press concerning objections to the PetroChina offering and criticism of Goldman's role in it he did so in reliance upon and in compliance with the legal advice provided to him.
LEGAL ANALYSIS
Section 5(b) of the Securities Act
Section 5(b)(1) of the Securities Act requires that a prospectus used after the filing of a registration statement meet the requirements of Section 10 of the Securities Act. Section 2(a)(10) of the Securities Act broadly defines "prospectus" to include any written communication that offers any security for sale. Emails are a form of written communication. Section 2(a)(3) of the Securities Act broadly defines "offer" to include attempts to dispose of, or solicitations of offers to buy, a security for value. Section 10 of the Securities Act requires that any such "prospectus" contain virtually all of the information required in a registration statement, other than exhibits.
Because the emails described above were written communications that offered securities, they were prospectuses, which had to meet the requirements of Section 10 of the Securities Act. The emails described above did not contain the information required by Section 10 of the Securities Act. See, e.g., In re Gold Properties Restoration Co., Inc., Release No. 6953 (Aug. 27, 1992); SEC v. People's Bank of Brevard, Inc. et al., Litigation Release No. 12753 (Jan. 14, 1991); In re Martin Rothman, Release No. 23654 (Sept. 30, 1986). Therefore, Goldman violated Section 5(b)(1) of the Securities Act when, as part of a sales effort, the five members of the Desk sent emails to customers during the waiting periods for the four offerings described above. The Commission is not required to prove scienter in an action under Section 5(b)(1). See, e.g., SEC v. Wills et al., 472 F. Supp. 1250, 1268 (D.D.C. 1978).
Section 5(c) of the Securities Act
Absent an exemption from registration, Section 5(c) of the Securities Act prohibits any offers to sell a security unless a registration statement for that security has been filed with the Commission. A prima facie violation of Section 5(c) is established by showing that: (1) no registration statement has been filed as to the securities to be offered; (2) the defendant, directly or indirectly, offered to sell the securities; and (3) the offer was made through the use of interstate facilities or the mails. SEC v. Randy, 38 F. Supp.2d 657, 667 (N.D. Ill. 1999). The Commission is not required to prove scienter. In The Matter of Terry Steen, et al., 64 SEC Docket 196 at 206, Admin. Proc. File No. 3-8798 (March 7, 1997). Once the Commission establishes a prima facie violation, the defendant assumes the burden of proving that the offer of the securities qualified for an exemption from registration. SEC v. Ralston Purina Co., 346 U.S. 119, 126 (1953). Courts narrowly construe the exemptions from the registration provisions of the Securities Act. SEC v. Murphy, 626 F.2d 633, 641 (9th Cir. 1980).
At the time the Senior Goldman Representative spoke to the press concerning PetroChina, no registration statement had been filed. Section 2(a)(3) broadly defines "offer" to include attempts to dispose of, or solicitations of offers to buy, a security for value. The Senior Goldman Representative's statements to the press were designed to correct a public perception that the money raised by the PetroChina offering would be used, at least in part, in Sudan rather than in China, and therefore would violate sanctions imposed by the U.S. In the context of this offering, in which the use of the offering proceeds was a controversial issue and a focus of efforts to prevent the PetroChina offering from going forward, these statements had the potential to facilitate the sale of PetroChina securities to concerned investors. The statements therefore constituted "offers." Because the statements were made over the telephone, and disseminated by national and international news publications, the offers were made through the use of interstate facilities, and constituted illegal offers under Section 5(c). (This Order does not address whether the statements by the Senior Goldman Representative constitute illegal offers under Section 5(b).)
Consequently, Goldman violated Section 5(c) when the Senior Goldman Representative communicated on its behalf with the Asian Wall Street Journal, Business Week, the Washington Post and the Los Angeles Times concerning the PetroChina offering as described above. These statements could reasonably have had the effect of arousing investors' interest in PetroChina's securities. The statements, therefore, constituted an illegal offer, because there was no registration statement on file at the time and no exemption from registration was applicable.
Prior to speaking to the press, the Senior Goldman Representative sought and obtained the guidance of Goldman's counsel, who, based on his belief that the proposed statements would not violate the federal securities laws, advised him that it was legal and proper for him to speak to the press concerning the use of the PetroChina offering proceeds in China, not in the Sudan, and the existence of firewalls in the transaction. The Senior Goldman Representative relied upon and complied with the legal advice he received. Because a violation of Section 5 does not require scienter, however, the legal advice provided to the Senior Goldman Representative does not relieve Goldman of liability for violating Section 5(c) of the Securities Act.
Goldman Failed Reasonably to Supervise its Employees on the Asian Shares Sales Desk
Section 15(b)(4)(E) of the Exchange Act requires broker-dealers to supervise reasonably, with a view to preventing violations of the federal securities laws, persons subject to their supervision. Goldman was responsible for supervising the members of the Desk who sent emails to customers in violation of Section 5(b) of the Securities Act. Goldman's responsibility in this regard included taking into account that members of the Desk had spent significant time working in Asia, where the rules concerning customer communications are different from those in the U.S.
"The Commission has repeatedly emphasized that the duty to supervise is a critical component of the federal regulatory scheme." In the Matter of Oechsle International Advisors, L.L.C., Admin. Proc. File No. 3-10554, 5 (August 10, 2001). Section 15(b)(4)(E) provides that a broker-dealer may discharge this responsibility by having "established procedures, and a system for applying such procedures, which would reasonably be expected to prevent and detect" such violations. "Where there has been an underlying violation of the federal securities laws, the failure to have or follow compliance procedures has frequently been found to evidence a failure reasonably to supervise the primary violator." In the Matter of William V. Giordano, Admin. Proc. File No. 3-8933 (January 19, 1996).
Goldman lacked an adequate system for applying the firm's procedures relating to compliance with Section 5 of the Securities Act to the Desk. The guidance and training provided to the Desk by the Compliance Officers and Goldman were confusing and incomplete, which caused the members of the Desk, including the Desk Supervisors, to lack a clear understanding of their obligations under Section 5 of the Securities Act.
The Desk Supervisors also did not understand the scope of their supervisory responsibility in this area. Neither undertook sufficient supervisory responsibility for compliance-related matters.
Under NASD Rule 3010(d)(2)3 and NYSE Rule 3424 relating to incoming and outgoing correspondence and email, a broker-dealer, such as Goldman, must have either: (1) a "pre-use" policy whereby public communications, such as emails, are reviewed before being sent to clients; or (2) policies and procedures that sufficiently educate its employees about the firm's communications policies and procedures, document the employees' education and training, and ensure that the firm's policies are implemented and followed.5
Goldman did not comply with either aspect of these rules with respect to the emails at issue. None of the emails described above was reviewed by a supervisor before being sent to customers. When the Desk Supervisors received improper emails sent by employees under their supervision, they failed to correct these violations. In addition, the Desk Supervisors both authored and sent their own improper emails without seeking review. Goldman also failed to sufficiently educate employees on the Desk regarding public communications, to document the employees' education and training, and ensure that the firm's policies were implemented and followed. In sum, Goldman had an inadequate system for applying the firm's procedures designed to prevent the sending of improper emails by its employees to the Desk.
Because the members of the Desk violated Section 5(b) of the Securities Act, and Goldman failed to have or to follow procedures reasonably designed to detect or prevent such violations, Goldman failed reasonably to supervise its employees for purposes of Section 15(b)(4)(E) of the Exchange Act.
IV.
In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in the Offer submitted by Goldman. Accordingly, it is hereby ORDERED that: Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, Goldman shall cease and desist from committing or causing any violations, and any future violations, of Sections 5(b) and 5(c) of the Securities Act. Goldman shall, within ten days of the entry of this Order, pay a civil money penalty in the amount of $2,000,000 to the United States Treasury. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the U.S. Securities and Exchange Commission; (C) hand-delivered or mailed to the Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter that identifies Goldman as the Respondent in these proceedings and the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Richard W. Grime, Assistant Director, Division of Enforcement, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington D.C. 20549-0800.
By the Commission.
Secretary
Endnotes
http://www.sec.gov/litigation/admin/33-8434.htm