NEW YORK (AP) -- Goldman Sachs Group Inc. has been ordered to pay $20.6 million to scammed investors who say the investment bank should have known about the Ponzi scheme pulled off by the collapsed Bayou Hedge Funds.

A three-person arbitration panel of the Financial Industry Regulatory Authority held the bank's Goldman Sachs Execution & Clearing unit, formerly known as Spear Leeds & Kellogg, liable in the dispute.

Stamford, Conn.-based Bayou collapsed in 2005, after the firm's then-CEO Samuel Israel III and Chief Financial Officer Daniel Marino admitted they lied about the company's profits and set up a fake accounting firm to falsify audits.

The $20.6 million award represents the money Bayou deposited into its accounts at Goldman, said attorney Ross Intelisano of Rich & Intelisano LLP, a New York firm that represents investors in securities cases. Goldman handled all of the hedge fund's trading between 1999 and 2004, when it stopped trading altogether, he said.

The fraud totaled about $250 million. The victims were mostly individuals who invested relatively modest amounts, about $300,000 to $500,000, Intelisano said. They were promised annual returns of 10 percent to 12 percent. Goldman maintained in its response in the case that the defrauded investors were "institutional and other highly sophisticated investors."

The Goldman money, when added to other funds recovered, will result in the investors getting back a total of about half of what they lost, according to Intelisano.

The case, heard by the FINRA panel, centered on the Bayou investors' claim that Goldman either knew or should have known of the deception, because it had marketing materials claiming consistent investment gains as well as account records showing losses.

"They should have done an investigation," said Intelisano. "They would have discovered, at least, that there was something wrong."

Goldman, in its response in the case, maintained it never controlled the funds in question or offered investment advice to Bayou, but merely processed the trades made by Bayou. The investment bank said it did not know of the fraud, and was not required by law to investigate its accountholders.

"We are disappointed with the award and are considering our options," said Goldman spokesman Ed Canaday.

Arbitration cases are rarely overturned, however. Intelisano maintains that the award will encourage other brokers and clearing houses to act if there is an indication their clients engage in questionable activity.

"I don't think that this is the last time that someone's going to steal money at a hedge fund," he said. "Now the firms that clear all those trades will have to pay more attention."

Israel and Marino pleaded guilty in 2005 to conspiracy, investment adviser fraud and mail fraud. Israel was sentenced to 20 years in jail for his role in the scheme, then staged his own suicide in 2008 in an attempt to avoid serving the time. He turned himself after a month on the lam.