DealBook | Goldman Fined $22 Million Over Trading Huddles
Investment Banking | Legal/Regulatory
Goldman Fined $22 Million Over Trading Huddles
By Susanne Craig
April 12, 2012 12:35 pm April 12, 2012 12:35 pm
Richard Drew/Associated PressTraders at the Goldman Sachs posts on the floor of the New York Stock Exchange.
Goldman Sachs agreed on Thursday to pay securities regulators $22 million to settle accusations that it did not have adequate policies in place to stop stock research tips from being passed inappropriately to its biggest clients.
In its complaint, the Securities and Exchange Commission said that top clients received preferential treatment through Goldman's "trading huddles," in which the bank's research analysts met frequently to develop trading tips that were passed on to the firm's traders and then select clients.
Some of their recommendations differed from ratings printed in Goldman's widely circulated long-term reports. The action follows an enforcement action by Massachusetts regulators, which fined Goldman $10 million in 2011.
Goldman's huddles, the S.E.C. said, "created a serious and substantial risk that analysts would share material, nonpublic information concerning their published research" with major clients. The S.E.C. also said that the firm's surveillance of trading of research "both in connection with huddles and otherwise, was deficient."
The Wall Street firm will pay $11 million each to the S.E.C. and the Financial Industry Regulatory Authority.
The S.E.C. order
"Higher-risk trading and business strategies require higher-order controls," said Robert S. Khuzami, director of the S.E.C.'s division of enforcement. "Despite being on notice from the S.E.C. about the importance of such controls, Goldman failed to implement policies and procedures that adequately controlled the risk that research analysts could preview upcoming ratings changes with select traders and clients."
The trading huddles grew out of a 2003 settlement with regulators in which several Wall Street firms, including Goldman, agreed to pay a $1.4 billion settlement to resolve accusations that they had been issuing overly optimistic stock research to win more lucrative investment banking business.
The settlement, in which the firms did not admit or deny wrongdoing, put up firewalls between research and investment banking. It also stopped the use of banking revenue to subsidize research.
As a result, Goldman executives began looking around for new ways to make money from stock research, and subsequently formalized the idea of trading huddles. The S.E.C. said that in exchange for the trading ideas, Goldman hoped to generate increased trading commissions.
The huddle program, regulators said, affected research analyst evaluations and "potentially" their compensation in several ways. Not only did trading partners rank analysts, but Goldman traders themselves would also provide feedback on analysts, which was used for performance reviews for analysts. "Analysts themselves commented on huddles in their own written evaluations," the S.E.C. said.
Goldman also agreed to complete a "comprehensive review" of its policies surrounding the investigation. "The firm is pleased to have this matter resolved," a Goldman spokesman said.
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