April was a gloomy month for Wall Street research. First, President Obama signed the Jumpstart Our Business Startups (JOBS) Act, prompting a flurry of hand-wringing as pundits cautioned that a provision of the new law would allow research analysts to provide opinions about certain emerging companies before, during and immediately after their IPOs — effectively breaking down the Chinese wall that regulators erected in 2003 to separate research from investment banking. Then, one week later, Goldman Sachs was fined $22 million for alleged collusion between its analysts and traders. For holding weekly “huddles” where stock ratings changes could have been discussed before being made public — and to which top investor clients were often party — the investment bank was accused of failing to “implement policies and procedures that adequately controlled the risk that research analysts could preview upcoming ratings changes with select traders and clients,” according to the Securities and Exchange Commission, which brought the charges along with the Financial Industry Regulatory Authority.
Goldman agreed to pay the fine without admitting guilt, though it acknowledged the huddles did occur between 2006 and 2011, and ended only after the Massachusetts attorney general levied a separate, $10 million penalty on similar charges.
The Goldman case “highlights once again the risks inherent in having analysts speaking in a way that is preferential in terms of what is said to some clients as opposed to others,” says Eliot Spitzer to Institutional Investor. As New York State attorney general, he played a key role in negotiating the 2003 settlement. He adds that other risks are likely to emerge when analysts “begin to be involved with the investment banking side of the house — marketing IPO services, which is what will follow from the recently passed and signed JOBS Act. That, to me, is the greatest concern.”
Others contend that the Goldman settlement was little more than a case of overzealous regulators. “We’re living in an environment where the regulators have become very proactive, very aggressive, and a firm such as Goldman or any other big investment bank will always be subject to heavy analysis and criticism,” says Ron Geffner, a former SEC official who is now a partner at New York–based law firm Sadis & Goldberg.
If, however, the potential to signal its own traders and key clients ahead of others — a policy Goldman called its Asymmetric Service Initiative — were “larger scale, that might be more concerning,” adds Geffner. Absent such details, he says, “it practically seems a victimless crime.”
More important, perhaps, is the effect the Goldman settlement could have. “Different companies are looking at it, and some are dusting off their internal controls and policies,” says Britt Latham, a chairman at Bass, Berry & Sims, in Nashville, Tennessee, who specializes in securities law and governmental investigations. “For some this will be an eye-opener, for others a reminder. It may be the cause of some sleepless nights.”
The poor publicity could also prove costly. “A lot of small portfolio managers may be wondering now if they’ll get a fair deal from Goldman,” says Charles Trzcinka, a former SEC economist and now a finance professor at Indiana University’s Kelley School of Business. “What’s worse, they might never become big enough for preferential treatment if others are receiving informational advantages.”
For Goldman the settlement provided the latest in a series of unflattering headlines. In March former Goldman executive director Greg Smith published a scathing op-ed reproaching the firm for callously disregarding customers’ interests. Last October former Goldman director Rajat Gupta was charged with passing inside information to Galleon Group (the trial begins in May), and related accusations have ensnared three other insiders. Two years ago Goldman paid the SEC $550 million for failing to reveal to clients certain details about subprime loan instruments. “There’s lots of evidence that the firm is stumbling, that it’s lost its course,” asserts Mark Williams, a former bank examiner with the Federal Reserve and now a professor of finance at Boston University.
Indeed, the fines themselves may be the least of it. To Williams, the penalties are so low they only reinforce this kind of behavior — which could be another omen that the Chinese wall has come tumbling down. (Last year Goldman reported profits of $4.4 billion on revenue of $28.8 billion.)
Asked to comment, Goldman spokesman Michael Duvally simply reiterates what had already been issued in a press release: “We are pleased to have resolved this matter,” he says, adding, “That’s the only thing I’m going to say on the record.” — Ben Mattlin
