Inspectors from the SFA, the self- regulatory organisation, wanted to look into Goldman's involvement in a series of put options sold to Maxwell- controlled companies. Put options allow the holder to buy shares at a pre- determined price from the company granting the option.
The options had the effect of allowing Maxwell to support the share price of Maxwell Communication Corporation at a time when he was not allowed to buy the company's shares.
Officials at the SFA have told the Independent on Sunday that they wanted to investigate whether Goldman may have breached SFA rules in the transaction. However, the regulators have not investigated the allegations because of a controversial report published by the Stock Exchange in May last year, which exonerated Goldman over the deals.
A working party of the Exchange, made up of three stockbrokers and a lawyer, concluded that Goldman had not breached any rules.
The SFA decided that because of this report, it should not investigate, despite pressure from within the regulator to probe further. 'We were told that if we came to a different conclusion than the Exchange, it would be embarrassing to the Exchange,' said an SFA official.
However, the Exchange denied that there was any pressure placed on the SFA not to investigate. 'They have their rules, which deal with the conduct of market participants, and we have our rules about the conduct of the market,' said a spokeswoman. 'What may not be an offence under our rules could be an offence under theirs.'
However, the SFA said that in practice an offence under its rules would usually have been an offence under the Exchange's rules. 'The Exchange is being a bit holier than thou in its explanation,' said an SFA official.
The Exchange's ruling on Goldman was attacked at the time as a 'whitewash' by stockbrokers and market- makers close to the situation. There was also understood to be some unease within the Exchange.
Shortly before the report was published, the head of the Exchange's quotations department, Gavin Fryer, who had been involved in the investigation of Goldman, took early retirement. The Exchange has denied there was any connection between Mr Fryer's retirement and the Goldman report, but a friend of Mr Fryer said that he was unhappy with the Exchange's reaction to Goldman's conduct.
When contacted, Mr Fryer refused to comment.
Goldman sold two 'European put' options to Maxwell-controlled companies, entitling Goldman to force Maxwell to buy 45.65 million shares in MCC - or nearly 5 per cent of the company.
Records obtained by the Independent on Sunday show that Goldman built up a substantial stake in MCC, which at various times exceeded the 3 per cent limit at which shareholdings have to be disclosed to the market.
However, Goldman was allowed, under the Companies Act, not to disclose the stake as it was a market-maker. It now appears that Goldman may not have been able to rely on the immunity given to a market-maker because the transaction may not have been in the normal course of market- making business.
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