Goldman Sachs Group Inc today lost an appeal against $20.6 million arbitration award which was won by the creditors of the bankrupt hedge fund group, Bayou Group.
The firm had argued that the arbitration panel had disregarded the rules of law in granting Bayou a victory in the case,. This argument was rejected in the 2nd appeal of U.S Circuit Court of Appeals.
According to a three panel judge at the appeals court, the manifest disregard in the manifest standard is by design and it is very difficult to satisfy it, and in this case Goldman has not been able to satisfy the same.
The case was being closely watched by Wall Street as the upholding of the decision would raise legal standard that are in place for clearance brokers in the likes of Goldman.
In an argument by the Securities Industry and Markets Association, a favorable ruling for Bayou creditors will force the brokers in analyzing the huge volumes of trading they process in addition to the daily fund transfers for determining if there is any kind of wrong doing by the customers.
Both representatives from Goldman and SIFMA declined to comment, when approached for the same.
A spokesperson from Bayou creditors committee said that the firm was glad that they are coming closer to getting some of the losses being recovered through this victory.
The case has stemmed out as a result of the collapse of Bayou Group LLC, a hedge fund that actually was nothing but a Ponzi Scheme.
In 2005, Samuel Israel and an executive from the bayou Group had pleaded guilty on criminal charges. A year later, Bayou Fund had filed for a chapter 11 bankruptcy.
In the year 2008, the creditors of Bayou filed for an arbitration against Goldman, which was holding accounts for Bayou as a clearance broker. The alleged charge was that Goldman had failed in looking into the alleged frauds and the frauds in transfers that were going on in the hedge fund.