Are Wall Street regulators dropping the ball again, only five years after the 2008 market crash? A lawsuit filed last week in federal district court in Manhattan against the Federal Reserve Bank of New York raises that and other disturbing questions.

Filed by Carmen Segarra, a former senior examiner for the New York Fed, the lawsuit alleges that she was fired after Fed supervisors pressured her to falsify her findings that Wall Street behemoth Goldman Sachs (2012 revenues: $34.163 billion) had established inadequate conflict of interest policies that were “full of holes” and failed to meet Fed requirements.

“They wanted me to falsify my findings,” Segarra said recently, “and when I wouldn’t, they fired me.”

An expert in legal compliance who had worked at Citigroup and the French bank Société Générale, Segarra was hired in October 2011 to be a “risk specialist” along with a cohort of others brought on to enforce the new Dodd-Frank law. Segarra was “assigned…to specifically examine Goldman Sachs’s conflict of interest program,” focusing on “three transactions discussed in the media – Solyndra, Capmark, and El Paso/Kinder Morgan” according to the complaint.

Goldman had a record of poor conflict of interest compliance. In 2010, for example, the Securities and Exchange Commission fined Goldman $550 million over conflicts related to Abacus, a mortgage deal the bank put together. A January 2011 Goldman report even admitted that the firm should “review and update conflicts-related policies and procedures, as appropriate.”

After examining Goldman’s conflict of interest rules, Segarra determined that the firm’s patchwork of policies did not comply with a Fed requirement that it have a single firm-wide policy. In fact, Segarra’s detailed notes from one of her first meeting with Goldman officials show that when asked for a copy of its conflict of interest policy, executives admitted that one didn’t exist. “It’s probably more than one document—there is no one policy per se,” conceded one Goldman executive.

In addition, Segarra found out that during the $23 billion El Paso/Kinder Morgan merger in 2012, Goldman had a $4 billion stake in Kinder while also advising El Paso on the deal—a clear conflict of interest. She also discovered previously unreported problems in Goldman’s conflict management, which were likewise criticized by the judge presiding over a shareholder lawsuit arising from the merger, as well as evidence that the firm falsely claimed that the New York Fed had approved a transaction with the Spanish bank Santander.

Armed with these findings, Segarra—backed up by several other risk specialists—recommended on March 21, 2012, that Goldman be downgraded from “satisfactory” to “fair” for its policies and procedures, a bit like earning a “C” instead of a “B.”

A week later, Segarra presented her findings to her boss, Michael Silva and his deputy, Michael Koh, and the notes she took included no objections from them. In fact, Segarra thought that Silva would back her up, based on comments he had made the prior December that he was worried that if the extent of Goldman’s conflict management problems became public, clients might leave the firm and cause serious financial damage, according to Segarra’s notes.

It appears that Segarra misread her boss’s concern to be about the economic damage Goldman’s conflict policies could cause, rather than about Goldman’s financial health. In any event, on May 15, Silva and Koh met with Segarra and pressured her to change her finding that Goldman had no firm-wide conflicts policy. According to Segarra, they presented no counter-arguments or evidence, other than referencing the 2011 firm report that had called for the company to “review and update conflicts-related policies and procedures,” without actually doing so.

Segarra refused, and three business days later, on May 23, she was summarily fired, her phone was seized and she was forced to leave the building under armed guard.

Although at present there is no proof than anyone at Goldman pressured the Fed for Segarra’s firing, the fact is that Goldman is well-known for its cozy ties with the New York Fed, whose current president, William Dudley, is a former Goldman partner. One of his predecessors, E. Gerald Corrigan, is a top executive at Goldman, and at the time of Segarra’s termination a former New York Fed chairman, Stephen Friedman, was head of the risk committee for Goldman’s board of directors.

“I was just documenting what Goldman was doing,” says Segarra. “If I was not able to push through something that obvious, the Federal Reserve Bank of New York certainly won’t be capable of supervising banks when even more serious issues arise.”

-Matt Bewig

To Learn More:

NY Fed Fired Examiner Who Took on Goldman (by Jake Bernstein, ProPublica)

Segarra v. Federal Reserve Bank of New York (Complaint) (pdf)

Goldman Sachs and Shell “Win” Public Shame Awards (by David Wallechinsky and Noel Brinkerhoff, AllGov)

Goldman Sachs and JPMorgan Chase Slapped Lightly on Corporate Wrists for Financial Malfeasance (by Noel Brinkerhoff, AllGov)