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Former Bank Examiner Files Wrongful Dismissal Suit Against New York Federal Reserve Bank Over Goldman Sachs Regulatory Dispute

GOLDMAN SACHS GANUV

Statements forthcoming from the US Federal Reserve System, and from its twelve regional member Federal Reserve Banks, are usually about the arcane details of monetary policy or about abstract papers of economic research. Amongst their responsibilities, however, it is also the duty of the regional Federal Reserve Banks to provide regulatory supervision of the private and public banking institutions that operate within their jurisdictions.

On Thursday one of the most important members of the US Federal Reserve System, the New York Federal Reserve Bank of New York (New York Fed), found itself having to issue a statement about a federal lawsuit just filed against it, in District Court for the Southern District of New York, by one of its former employees in a case that has already become exceedingly high profile before even being heard. In the statement of claim a former regulatory supervisor who worked for the New York Fed, Carmen Segarra, claims she was fired from the bank simply because she refused to retract a finding that one of the financial institutions she supervised there, Goldman Sachs, effectively had no enterprise wide conflict of interest policy in place to determine when it might be acting against the interest of its own clients, something which it is legally required to do.

This is of course potentially dynamite as Goldman Sachs is one of the largest and most successful financial institutions in America. Moreover Goldman had, at the time the events in the statement of claim allegedly took place, even been heavily criticized by a Judge in one particular lawsuit where Goldman was indeed alleged to have been acting knowingly, and even openly, for its own account and possibly against the interests of its clients.

Responding to the lawsuit the statement from the New York Fed says simply, and in full:

“We cannot speak about individual employees out of privacy considerations nor can we discuss supervised institutions as that would constitute Confidential Supervisory Information. The New York Fed provides multiple venues and layers of recourse for its employees to freely express concerns about the institutions it supervises. Such concerns are treated seriously and investigated appropriately with a high degree of independence. Personnel decisions at the New York Fed are based exclusively on individual job performance and are subject to thorough review. We categorically reject any suggestions to the contrary.”

There is a golden rule in business and in life, something to the effect that when you don’t know what to say say nothing. This new statement takes that principle to a whole new level, as it comprehensively says absolutely nothing at all about the case in question but does so in the exceptionally oblique, and wonderfully obfuscating, language so beloved by Central Banking institutions when they are talking about the business of money itself.

This may now be shaping up therefore to potentially be a major public row, and sections of the press, and many of Goldman’s numerous critics, are already likely licking their lips to see how it will unfold.

According to Thursday’s statement of claim the facts appear to be as follows.

Carmen Segarra, 41, was a Senior Bank Examiner at the New York Fed where she had been hired in October 2011. Formerly she was legal counsel for a major international bank and is a senior lawyer. She states in the lawsuit that as part of her job she examined the legal and compliance divisions of Goldman Sachs in late 2011 and early 2012, at the request of her employer, and found that they lacked a conflict of interest policy that conformed with federal banking regulations. In a nutshell, she claims she was then fired for cause in May 2012 simply because she refused to withdraw the findings she had made that Goldman Sachs was not in compliance with its responsibility to have such conflict of interest policies in place.

Her lawsuit is filed against The New York Fed itself, and also against her immediate supervisor Jonathan Kim as well as a person described in the lawsuit as the New York Fed’s relationship manager with Goldman, Senior Vice President Michael Silva and his Assistant Vice President Michael Koh. The suit opens by accusing the defendants of breaking laws that explicitly prohibit the obstruction of, and interference with, the work of a Bank Examiner. Item 4 of the suit then claims that the defendants improperly caused her reputational and professional harm by firing her for cause. Specifically, it states they suddenly, after months of receiving evidence, changed their position and said her finding that Goldman Sachs had no compliant conflict of interest policy in place was not credible.

Accordingly Carmen wants her job back, payment of back pay and benefits, as well as compensatory damages, punitive damages and legal costs, all to be determined by the Court.

“Defendants repeatedly obstructed and interfered with Carmen’s examination of Goldman over several months” according to the complaint. “Finally, in May 2012 defendants directed Carmen to change the findings of her examination. Carmen refused. Because Carmen refused to change her findings, defendants terminated her three business days later, on May 23, 2012.”

In one meeting, Michael Silva allegedly said that the New York Fed “possessed information about Goldman that could cause Goldman to ‘explode, ’” Segarra also said in her complaint.

As background to the suit, in 2011 various news sources published articles about three separate Goldman Sachs transactions that appeared to raise possible questions about Goldman’s management of its conflicts of interest. The three transactions were known as Solyndra, Capmark, and El Paso/Kinder Morgan.

The New York Fed had hired Carmen Segarra on October 31, 2011 with the title of Senior Bank Examiner. She was then assigned to specifically examine Goldman Sachs’ conflict of interest programme and the three transactions that had been discussed in the media – Solyndra, Capmark, and El Paso/Kinder Morgan.

Under the Bank Holding Company Act of 1956 and the Federal Reserve Act, in August of 2008 the US Federal Reserve issued a supervisory regulation, not surprisingly called “SR 08-08” in the language of bureaucrat-speak, that requires large complex banking organizations to implement a company-wide conflict of interest programme that is documented with a defined set of policies and procedures and compliance risk management standards. SR 08-08 actually states: “The processes established for managing compliance risk on a firm-wide basis should be formalized in a compliance program that establishes the framework for identifying, assessing, controlling, measuring, monitoring, and reporting compliance risks across the organization, and for providing compliance training throughout the organization. A banking organization’s compliance risk management program should be documented in the form of compliance policies and procedures and compliance risk management standards.”

As further backdrop to her investigation during this period, at the end of February, 2012, Judge Strine of the Delaware Court of Chancery had issued a written decision reluctantly denying an injunction in a case responding to a shareholder petition asking him to stop the El Paso/Kinder Morgan merger for which Goldman had been giving financial advice to El Paso but who was also a major stakeholder in Kinder Morgan. This was one of the three cases in the media that had prompted the New York Fed review of Goldman’s practices in the first place and one that was eventually settled out of court.

In his decision however, Judge Strine criticized Goldman’s management for financial conflicts of interest at play in the proposed merger and noted “Goldman’s huge financial interest in Kinder Morgan.” At one point Judge Strine even commented that “Goldman had its hands in the dough.” Judge Strine noted Goldman owned approximately US$4 billion worth of Kinder Morgan stock. Judge Strine also said, “Goldman’s lead banker failed to disclose his own personal ownership of approximately US$340, 000 in Kinder Morgan stock, a very troubling failure that tends to undercut the credibility of his testimony and of the strategic advice he gave.”

Accordingly, with this statutory backing Carmen Segarra set about her work, only to be troubled by delays in receiving information from, and the nature of some of the responses she was getting in her questions to, Goldman. Eventually she came to the conclusion that Goldman lacked any conflict of interest policy that conformed with federal banking regulations, and indeed the statement of claim asserts that Goldman had effectively said the same itself at meetings that took place between Goldman and the New York Fed.

Carmen Segarra alleges she was eventually fired because she refused to withdraw her findings, even though the New York Fed’s own risk and compliance group was getting ready to support such a conclusion. “Defendants repeatedly obstructed and interfered with Carmen’s examination of Goldman over several months, ” according to the complaint. “Finally, in May 2012, defendants directed Carmen to change the findings of her examination. Carmen refused. Because Carmen refused to change her findings, defendants terminated her three business days later, on May 23, 2012.”

Segarra is an expert in legal and regulatory compliance whose previous work included jobs at Citigroup and the French bank Société Générale. She was part of a group of several new examiners hired by the New York Fed to monitor systemically important banks after passage, in July 2010, of the Dodd-Frank regulatory overhaul, which gave the Fed new oversight responsibilities.

According to the web site Pro Publica, Goldman is known for having close ties with the New York Fed, which is its primary regulator. The current President of the New York Fed, William Dudley, is a former Goldman partner. One of his New York Fed predecessors, E. Gerald Corrigan, is currently a top executive at Goldman. At the time of Segarra’s firing, Stephen Friedman, a former Chairman of the New York Fed, was head of the risk committee for Goldman’s board of directors.

A spokesman for Goldman Sachs said in an emailed statement “As we have described publicly in our business standards committee report, Goldman Sachs has a comprehensive approach to addressing conflicts through firm-wide and divisional policies and infrastructure, ” The spokesman also pointed to a bank document that says Goldman took recent steps to improve management of conflicts.

The case will now presumably proceed under many watchful eyes, and we will be providing updates as progress is made. The often told joke on Wall Street about Goldman Sachs “If you have a conflict, we have an interest, ” may be more relevant than ever.

Today, Segarra works at another financial institution at a lower level than she feels her qualifications merit. She worries about the New York Fed’s ability to stop the next financial crisis.

“I was just documenting what Goldman was doing, ” she said to Pro Publica. “If I was not able to push through something that obvious, the New York Fed certainly won’t be capable of supervising banks when even more serious issues arise.”

 

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