By Douwe Miedema

WASHINGTON, Dec 7 (Reuters) - Goldman Sachs Group Inc was fined $1.5 million to settle charges it failed to supervise its traders and allowing one futures dealer to hide billions in dollars from sight and causing a $118 million loss.

Ex-Goldman trader Matthew Marshall Taylor in 2007 camouflaged an $8.3 billion position, manually entering fake trades, the Commodity Futures Trading Commission (CFTC) said on Friday.

"Goldman failed to have policies or procedures reasonably designed to detect and prevent the manual entry of fabricated futures trades into its front office systems," the top U.S. derivatives regulator said.

"As a result, on seven trading days in November and December 2007, Taylor circumvented Goldman's risk management, compliance, and supervision systems," the CFTC said.

In a lawsuit in New York in November, the CFTC sought a $130,000 civil penalty against Taylor, who at the time was a vice president at the bank's Capital Structure Franchise Trading desk, and later went to work for Morgan Stanley.

Goldman Sachs took a $118 million loss in unwinding the position in e-mini S&P 500 futures contracts.

"Taylor's activity was flagged by our controls on December 14, with no impact to customer funds," Goldman Sachs said in an emailed statement. "Since these events, we have enhanced our controls. We're pleased to have settled this matter."

Taylor had established the position on Dec. 13, 2007.

Bart Chilton, a Democrat and one the CFTC's commissioners, thought the penalty was too low.

"I believe that the monetary penalty should be significantly higher in order to represent a sufficient punishment, as well as to denote a meaningful deterrent to future illegal activity," Chilton said in a statement. 

(Additional reporting by Lauren Tara LaCapra)

Follow us on Twitter @ReutersLegal | Like us on Facebook