The Financial Services Authority has fined London-based Goldman Sachs International £17.5 million ($27 million) for breaches of FSA rules, following US allegations that the Wall Street giant misled investors over the sale of collateralised debt obligation securities.

The FSA fine relates to Goldman's failure to notify the UK regulator of matters relating to the US Securities and Exchange Commission investigation into the Abacus 2007-AC1, a synthetic CDO, according to a statement from the FSA.

The Abacus product was structured by GSI’s US affiliate, Goldman Sachs & Co and marketed (in part) by GSI from the UK to institutional investors. Fabrice Tourre was, while at GSC, part of the team that structured Abacus for hedge fund manager John Paulson specifically so that he could short it. The SEC alleged that Goldman and Tourre failed to inform certain investors about Paulson’s role in picking a portfolio he thought likely to lose value. Tourre transferred to GSI in London and became an FSA-approved person in November 2008.

The case has highlighted the potential conflicts of interest that can arise in such situations; when the story originally emerged, industry commenters told this publication that Goldman's wealth management business could see outflows as a result of the affair. Goldman Sachs has strenously denied any wrongdoing.

In August 2008, the SEC began making enquiries of GSC regarding Abacus. Over the next year the SEC obtained documents and witness evidence about Abacus from GSC and from GSI London-based personnel. Despite the involvement of GSI in the marketing of Abacus and the involvement of UK approved people in the SEC investigation, no one at GSC or GSI considered the potential regulatory implications of the SEC investigation for GSI, the FSA said in its statement on the matter.

GSI did not have effective systems and controls in place to ensure that relevant information about the SEC investigation was shared between GSC and the people within GSI who needed to know about it. In particular, GSI did not have effective procedures in place to ensure that its compliance department was made aware of the SEC investigation so that it could consider whether any notifications needed to be made to the FSA in compliance with GSI’s regulatory reporting obligations, the statement continued.

Following its investigation, the SEC issued notices to GSC and Tourre containing allegations of serious violations of US securities law relating to Abacus, which GSI did not tell the FSA about.  As a consequence of GSI’s failure to notify, Tourre remained approved in the UK and able to perform a controlled function for several months without further enquiry or challenge from the FSA, the regulator said.

GSI’s compliance department only became aware of the SEC investigation when, in April 2010, the SEC announced that it had commenced enforcement proceedings in the US courts against GSC and Tourre. In July 2010, the SEC reached a $550 million settlement with GSC in relation to Abacus. Tourre denies the allegations against him; he is currently on leave from the bank.

The FSA investigation found that GSI did not deliberately withhold any information from the FSA. GSI co-operated fully and agreed to settle at an early stage. In doing so it qualified for a 30 per cent discount.

“This is yet another example of how the FSA are tightening their grip on financial institutions that bend the rules and, in this instance, it is very much a question of jurisdictional responsibility that has been put under the spotlight," said Andrew Shrimpton, former head of regulation at the FSA and now member, regulation at the professional services firm Kinetic Partners.

"It highlights how global companies can often overlook the requirement to inform the FSA of significant issues, especially if they are already being investigated by another regulatory body. Goldman Sachs did not immediately recognise their responsibility to report to the UK regulatory authority, as well as the SEC. The FSA have reacted by handing out a huge fine, demonstrating that a breach of regulation of this sort made by a US-based company is just as consequential for the UK market," he added.