Goldman Sachs has agreed to pay $2 million (£1.3 million) in civil penalties to settle allegations that it allowed customers to profit illegally by selling shares short just before public offerings.

The settlement is the first between the Securities and Exchange Commission and a brokerage firm where the US regulator alleged that the firm played a role in a type of abusive short-selling practice known as “naked” short selling.

The practice, in which hedge funds and other investors sell shares before they have borrowed them from a broker, has prompted a high-profile backlash from several US businesses claiming to have been victims of the technique.

Christopher Cox, the SEC chairman, said: "That is an important case and it reflects our interest in this area."

He declined to say whether the SEC was investigating other Wall Street firms for naked short-selling abuses.

Goldman Sachs declined to comment. The firm settled without admitting or denying wrongdoing.

The regulators said that certain Goldman clients made share trades through the bank’s direct access system, called REDI.

Clients who were selling shares short — or selling borrowed shares in a bet on falling prices — had misrepresented their trades in the system as "long", indicating that they were selling shares they owned, the SEC said.

Customer agreements allow brokerage firms to rely on such representations.

But because the shares were not actually in the client accounts, Goldman had to lend shares to its customers to complete the trades, regulators said.

The result was a pattern of illegal trading ahead of share offerings from March 2000 to May 2002 that went undetected but should have been investigated by the brokerage firm, the SEC said.

"A broker must have a reasonable basis to believe its customers' representations that they own the securities they are selling," David Nelson, an SEC director, said in a statement.

"If, as in this case, there are significant trading disparities indicating that a customer may be lying to the broker, the broker must investigate the customer's trading and review its trading records to determine whether it can reasonably continue to rely on the customer's representations," Mr Nelson added.

For two years the SEC has been focusing on abusive short selling that violates a regulation intended to prevent abuses that can take place when companies conduct secondary or follow-on share offerings.

Mostly, those cases have been brought against hedge funds or individuals who have been accused of using improper tactics to cover short sales with shares they had purchased through such additional offerings.

"This is the first case that we've brought against a broker," Teresa Verges, an assistant director of the SEC, said.

The case grew out of an earlier action involving individual brokers.

In 2003 the brokers Ethan Weitz and Robert Altman agreed to pay more than $1 million to settle charges that they had engaged in short selling before 15 share sales.

Securities rules prevent such trading on the theory that it can manipulate the prices that companies are able to generate through their share sales.

Although the two traders were not mentioned by name in the SEC's case against Goldman, they were two of the clients who traded through the firm's direct-access system.

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