Ex-Fed Examiner Claims Firing for Finding Goldman Lapses
By Bob Van Voris, Patricia Hurtado & Caroline Salas Gage – Oct 11, 2013 12:01 AM ET
A former senior bank examiner for the Federal Reserve Bank of New York sued her ex-employer, claiming she was fired because she refused to change her findings that Goldman Sachs Group Inc. (GS) lacked a firmwide conflict-of-interest policy.
Carmen Segarra, 41, said in a lawsuit filed yesterday in Manhattan federal court that she examined the legal and compliance divisions of Goldman Sachs in late 2011 and early 2012 and found that they lacked a policy that conformed with federal banking regulations. She alleges she was fired because she refused to withdraw her findings.
The U.S. flag hangs on the facade of the Federal Reserve Bank of New York headquarters in New York. Photographer: Daniel Acker/Bloomberg
“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.”
Michael Silva, who is named as a defendant, was the New York Fed’s relationship manager for Goldman Sachs, according to Segarra. In a meeting, he said the Fed “possessed information about Goldman that could cause Goldman to ‘explode,’” Segarra said in her complaint.
In her complaint, Segarra cites e-mails with Silva in which she argues that Goldman Sachs doesn’t have a firmwide policy that met requirements while Silva accuses her of telling him the bank didn’t have a policy at all.
“A judge would have to weigh whether she was engaging in a protected activity or just doing a bad job,” said Michael Weil, an employment-law partner at Orrick Herrington & Sutcliffe LLP who isn’t involved in the case. “People can be true whistle-blowers even if they are wrong, but they have to have been both objective and acting in good faith in what they were doing.”
In addition to the New York Fed and Silva, Segarra sued Silva’s deputy, Michael Koh, and Johnathon Kim, Segarra’s supervisor.
Jack Gutt, a spokesman for the New York Fed, said in an e-mailed statement yesterday that the institution can’t discuss Segarra or Goldman Sachs, citing confidentiality rules.
“The New York Fed provides multiple venues and layers of recourse for its employees to freely express concerns about the institutions it supervises,” Gutt said in the statement. “Such concerns are treated seriously and investigated appropriately with a high degree of independence.”
Andrew Williams, a spokesman for New York-based Goldman Sachs, said in an e-mail that the company has no knowledge of internal Fed discussions or the matters raised by Segarra.
“As we have described publicly in our business standards committee report, Goldman Sachs has a comprehensive approach to addressing conflicts through firmwide and divisional policies and infrastructure,” Williams said.
Segarra’s lawyer, Linda Stengle, said yesterday in a phone interview that her client was one of a wave of bank examiners hired by the New York Fed in 2011 under the Dodd-Frank Act. She began Oct. 31, 2011, and was assigned to examine Goldman Sachs’s conflict-of-interest program in three transactions: Solyndra LLC, Capmark Financial Group Inc. (CPMK) and Kinder Morgan (KMI) Inc.’s takeover of El Paso Corp.
Segarra later found that Goldman Sachs fabricated information about performing due diligence on a fourth transaction, one involving Banco Santander SA (SAN), according to the complaint. She also claimed Goldman Sachs had misrepresented the New York Fed’s approval of that transaction.
Aug. 2 (Bloomberg) — Roel Campos, a partner at Locke Lord Bissell & Liddell LLP and a former commissioner at the U.S. Securities and Exchange Commission, talks about the verdict in the investor fraud trial of former Goldman Sachs Inc. Vice President Fabrice Tourre. Tourre was found liable for fraud in a failed $1 billion investment. Campos speaks with Erik Schatzker and Sara Eisen on Bloomberg Television’s “Market Makers.” (Source: Bloomberg)
“The Federal Reserve Bank of New York was clearly caught off guard,” Stengle said. “The New York Fed had expanded the number of examiners it had in 2011, they were doing a more in-depth examination and she happened to be the person who drew Goldman.”
Segarra claims the defendants harmed her career and reputation by firing her for cause. She seeks an order stating they illegally interfered with her bank examination and reinstating her to her job. Segarra also asked for unspecified damages.
“To our knowledge, an action like this has not been filed before, so we’re anxious that the court will do the right thing,” Stengle said.
Segarra said in a May 11, 2012, e-mail cited in the complaint that Goldman Sachs “does not have a conflicts-of-interest policy, not firmwide, and not for any divisions.”
“I would go so far as to say they have never had a policy on conflicts,” Segarra wrote. “I am happy to circulate Barclays’ and Morgan Stanley’s conflicts-of-interest policy so you guys can get a sense of what such a policy actually looks like — let me know!”
Two days later, Silva sent her an e-mail saying he was “very troubled” by her messages and questioned her judgment, saying that she wasn’t following procedures for flagging matters requiring attention.
Silva said he had repeated her assertion that Goldman Sachs had no conflict-of-interest policies during a meeting, “relying in part on statements that you have made repeatedly to me.” He said he was later corrected.
“It was pointed out to me after the vetting session that, in fact, GS has a written code of conduct,” Silva wrote. “Moreover, in light of your repeated and quite adamant assertions that Goldman has no written conflict-of-interest policy, you can understand why I was surprised to find a ‘Conflict of Interest Section’ (pasted below) in Goldman’s code of conduct that seems to me to define COI, prohibit COIs, and instruct employees what to do about COIs.”
Silva said he also reviewed another Goldman document outlining policies and procedures for conflicts.
“In light of these documents, repeated statements that you have made to me that GS does not have a COI policy AT ALL are debatable at best, or alternatively, plainly incorrect,” Silva wrote.
“The existence of written GS COI materials that I have discussed, which are easily available, combined with the absence of clearly established Federal Reserve standards in this area, have caused me to raise serious questions in my mind as to your judgment in reaching and communicating conclusions without a sound basis in the supervisory process and before the due diligence and vetting process is complete,” he wrote.
Goldman Sachs sought to address the firm’s conflicts of interest in 2010, when it created a business standards committee to review the firm’s operations. The move came after it was sued by the U.S. Securities and Exchange Commission over the 2007 sale of a mortgage-linked investment.
The company agreed to pay $550 million and change business practices to settle SEC claims it misled investors. Fabrice Tourre, a former Goldman Sachs vice president who worked on the deal, was found liable for his role and faces unspecified fines. He has asked the court to reverse its verdict and grant him a new trial.
In the business standards committee’s January 2011 report, eight of the 39 recommendations addressed conflicts of interest. Those included moving some underwriting units out of the trading division, giving clients written disclosure of what activities it may conduct while advising the client, and making a “comprehensive compilation” of its conflict-of-interest policies available to employees during training.
The firm said in May that Chief Executive Officer Lloyd C. Blankfein, 59, led 23 three-hour sessions in 2011 and 2012 with partners and managing directors that stressed personal accountability and included a case study about communications within the firm and with clients following the report.
Less than 14 months after the report was published, Goldman Sachs was rebuked by Delaware Chancery Court Judge Leo Strine for “incomplete and inadequate” handling of a “real and potent” conflict of interest in advising on the merger of Kinder Morgan and El Paso.
Strine cited “the disturbing nature of some of the behavior” leading to the terms of the $21.1 billion deal, Goldman Sachs’s biggest takeover assignment of 2011. The bank, which stood to get a $20 million fee from El Paso, had a $4 billion stake in Kinder Morgan and two employees on its board, both of whom recused themselves from negotiations.
In addition, Goldman Sachs partner Stephen D. Daniel, then-co-head of global energy investment banking in Houston and lead banker on the El Paso deal, didn’t disclose his personal ownership of about $340,000 in Kinder Morgan stock, the judge wrote. Daniel retired from the firm this year, the Wall Street Journal reported.
The case is Segarra v. Federal Reserve Bank of New York, 13-cv-07173, U.S. District Court, Southern District of New York (Manhattan).
To contact the reporters on this story: Bob Van Voris in federal court in Manhattan at email@example.com; Patricia Hurtado in federal court in Manhattan at