Goldman Sachs Under Investigation in Currency Probe

Goldman Sachs Group Inc. (GS), the world’s most profitable securities firm before the financial crisis, said it’s under investigation by regulators probing the potential manipulation of foreign-exchange rates.

Currencies and commodities were added to a list of financial products and related activities that are subject to investigation, according to a regulatory filing published by the New York-based company today. The filing also added options trading and technology systems and controls to the list.

Investigators are looking at the firm’s “trading activities and communications in connection with the establishment of benchmark rates,” Goldman Sachs said in the filing. The company “is cooperating with all such regulatory investigations and reviews.”

At least eight banks including Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM) have said they’re being investigated by authorities examining the $5.3 trillion-a-day foreign-exchange market and are cooperating. Citigroup, JPMorgan and Barclays Plc (BARC) have suspended or put on leave some of their most senior currency traders amid the inquiry. No one has been accused of wrongdoing.

The U.S. Federal Reserve is examining legal and regulatory exemptions that have allowed banks including Goldman Sachs to trade and own raw materials such as oil, coal and metals, a person with knowledge of the matter said last month.

Photographer: Victor J. Blue/Bloomberg

Goldman Sachs Group Inc.'s headquarters stands in New York. Close

Goldman Sachs Group Inc.'s headquarters stands in New York.

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Photographer: Victor J. Blue/Bloomberg

Goldman Sachs Group Inc.'s headquarters stands in New York.

Legal Losses

In August, a programming error caused Goldman Sachs to send faulty stock-options orders. An internal system inadvertently produced orders with inaccurate price limits and sent them to exchanges, a person familiar with the situation said at the time. Most of the trades caused by the error were canceled, a person with direct knowledge of the matter said.

Goldman Sachs said the next month that R. Martin Chavez, co-head of the firm’s equities trading division, will take over leading the firm’s technology division from Steven Scopellite, who’s retiring.

The firm also disclosed today that it’s “reasonably possible” legal losses rose to $4 billion in the third quarter. The figure, which represents an estimate of how much legal costs may exceed reserves, increased from $3.5 billion in the second quarter and compares to $5.7 billion for JPMorgan and $5.1 billion for Bank of America Corp.

Shared Information

Bloomberg News reported in June that currency dealers in the industry said they shared information about their positions through instant messages, executed their own trades before client orders and sought to manipulate the benchmark WM/Reuters rates by pushing through trades before and during the 60-second windows when the benchmarks are set.

The WM/Reuters rates determine what many pension funds and money managers pay for their foreign exchange and are used by index providers such as FTSE Group and MSCI Inc. (MSCI) to calculate daily valuations of indexes that span multiple currencies. Even small movements could affect the value of what Morningstar Inc. (MORN) estimates is $3.6 trillion in funds including pension and savings accounts that track global indexes.

Because banks agree with clients to trade at the WM/Reuters rates, regardless of later moves, dealers are at risk of losses if the market moves against them.

The rates are published hourly for 160 currencies and half-hourly for the 21 most-traded. They reflect the median of all trades in a minute-long period starting 30 seconds before the beginning of each half-hour. Rates for less-widely traded currencies are based on quotes during a two-minute window.

The data are collected and distributed by World Markets Co., a unit of Boston-based State Street Corp. (STT), and Thomson Reuters Corp. Bloomberg LP, the parent company of Bloomberg News, competes with Thomson Reuters in providing news and information as well as currency-trading systems.

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Michael J. Moore in New York at mmoore55@bloomberg.net

To contact the editors responsible for this story: Edward Evans at eevans3@bloomberg.net; Peter Eichenbaum at peichenbaum@bloomberg.net

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