United States: SEC & Massachusetts Sanction Goldman Sachs $16 Million, Underscoring Need For Vigorous Compliance With Pay-To-Play Rules

The U.S. Securities and Exchange Commission announced today that Goldman Sachs & Co. and one of its former vice presidents have been charged with violating MSRB Rule G-37 and Rule G-17 and have been ordered to pay nearly $16 million in sanctions to the SEC and the Commonwealth of Massachusetts—reportedly the largest single fine imposed by the SEC for MSRB pay-to-play violations.  The charges involve certain undisclosed in-kind and cash campaign contributions made by Goldman Sachs and the former vice president to then-Massachusetts Treasurer Timothy Cahill while Mr. Cahill was also a candidate for Governor of Massachusetts.  During the two years after these contributions were made, Goldman Sachs managed thirty negotiated underwritings totaling approximately $9 billion by issuers for which Mr. Cahill was a covered official, receiving fees totaling more than $7 million.  The SEC Order underscores the need for financial services firms and investment professionals to adopt and rigorously enforce procedures designed to ensure compliance with SEC & MSRB pay-to-play rules, including closely monitoring the activities of politically-active principals and executives.

Employee's use of Goldman Sachs resources constituted in-kind contribution to covered official attributable to Goldman Sachs

As a broker-dealer and registered municipal securities dealer, Goldman Sachs is subject to MSRB Rule G-37, which provides that no broker, dealer, or municipal securities dealer may engage in municipal securities business with an issuer within two years after any contribution to an official of such issuer is made by, (1) the broker, dealer, or municipal securities dealer, (2) a municipal finance professional associated with such broker, dealer, or municipal securities dealer, or (3) a political action committee controlled by the broker, dealer, or municipal securities dealer or one of its municipal finance professionals.  Rule G-37 also requires brokers, dealers, and municipal securities dealers to disclose certain contributions made to officials to the MSRB on a quarterly basis.

Mr. Cahill, as Treasurer of Massachusetts, was responsible for or had the authority to appoint persons responsible for hiring of brokers, dealers, or municipal securities dealers for various Massachusetts municipal securities issuers.  This role rendered Mr. Cahill an "issuer official" of such issuers under Rule G-37.  According to the SEC Order, beginning in July 2008, Neil Morrison was employed as a vice president in Goldman Sachs's Boston office to solicit municipal underwriting business from the Massachusetts Treasurer's Office, among others.  During this period, Mr. Morrison was involved in Mr. Cahill's gubernatorial campaign and assisted the campaign in various manners from his Goldman Sachs office using its resources, including phones, computers, e-mail and office space.  Among other activities, the SEC noted that Mr. Morrison engaged in extensive activities for the campaign during work hours and sent "at least 364 campaign-related e-mails using his Goldman Sachs e-mail account."  During this same period, Mr. Morrison was provided with internal information about Treasurer's Office deliberations concerning underwriter selection by Mr. Cahill and his staff.

The SEC found that Mr. Morrison's campaign activities during work hours and use of Goldman Sachs resources constituted undisclosed in-kind contributions to Mr. Cahill's campaign attributable to Goldman Sachs.  The SEC also found that Mr. Morrison made an undisclosed $400 cash contribution to Mr. Cahill's campaign during this period that was not properly disclosed to the MSRB.

Close monitoring of certain politically-active municipal finance professionals required, and sub-certifications of compliance not necessarily sufficient

Despite the fact that Mr. Morrison had certified to Goldman Sachs that he had disclosed all of his political contributions and activities, the SEC found that "Goldman Sachs failed to adopt, maintain, and enforce written supervisory procedures reasonably designed to ensure his compliance with MSRB rules."  According to the SEC, "Goldman Sachs should have taken additional steps to ensure Morrison's compliance in light of the fact that the firm knew that he had a political background, had a personal relationship with Cahill, and that he had a close relationship with other issuer employees."  The SEC also found that Goldman Sachs had failed to "detect Morrison's use of e-mails for his campaign activities" and did not "conduct any specific review of Morrison's compliance with MSRB rules."

Thus, if a municipal securities broker or dealer is aware that one of its municipal finance professionals is politically connected to or involved with a covered official, then simply requiring the employee to regularly complete a certification attesting to their compliance with Rule G-37 is insufficient.  Rather, additional steps must be taken to ensure compliance, including closely monitoring the employee's activities conducted during work hours and the employee's use of company resources, including office space, telephones, and e-mail accounts.

This article is designed to give general information on the developments covered, not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice.

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