Goldman Sachs & Co. agreed today to pay $22 million to settle charges that the firm lacked safeguards to prevent analysts from sharing confidential information with traders during weekly meetings.
In meetings known as "huddles," Goldman equity research analysts revealed their best trading ideas to firm traders and a select group of Goldman's top clients. The problem, according to the U.S. Securities and Exchange Commission administrative order settling the case, was that this "created a serious and substantial risk that analysts would share material, nonpublic information…Goldman did not establish, maintain, and enforce adequate policies and procedures to prevent such misuse."
Goldman, which did not admit or deny the charges, will pay $11 million each to the SEC and the Financial Industry Regulatory Authority to settle the matter.
In one example detailed by FINRA of how information was misused, an analyst in a 2008 huddle said, “We expect companies with consumer and small business exposure to be under pressure in the current environment, including [company x].” The next day, the analyst received approval to downgrade the company from "neutral" to "sell," and to add the stock to Goldman's conviction sell list. Goldman published an equity research report making these changes that same day.
"Goldman's trading huddles created an environment of heightened risk in which material non-public information concerning analysts' published research could be disclosed to its clients,” said Brad Bennett, FINRA’s executive vice president and chief of enforcement, in a news release. “In addition, the firm did not have an adequate system in place to monitor client trading in advance of changes in its published research."
Beginning in 2006, Goldman began holding weekly huddle meetings in each of its seven equity research sectors. In 2007, Goldman began a program known as the Asymmetric Service Initiative, or ASI, where analysts shared information and trading ideas from the huddles with select clients. According to the SEC, during the meetings analysts and traders, and sometimes sales people, discussed recent developments, market color and short-term trade ideas. “In return for sharing trading ideas and market color through the ASI service, Goldman hoped to generate increased trading commissions from ASI clients,” the SEC stated.
Section 15(g) of the Exchange Act requires broker-dealers to establish, maintain and enforce written policies and procedures to prevent the misuse of non-public information. The SEC in its administrative order found that Goldman “willfully violated” the act.
“The circumstances concerning these huddles were red flags that should have alerted Goldman to the need for both adequate review of the instances and stronger controls surrounding the huddles and ASI in order to prevent the potential misuse of material, nonpublic information concerning its analysts’ published research,” the SEC order stated.
In addition to the penalties, Goldman agreed to complete a comprehensive review of its procedures and practices related to the SEC’s findings, and to adopt new policies to address shortcomings.
It’s not Goldman’s first offense. In 2003, the firm paid a $5 million penalty and more than $4.3 million in disgorgement and interest to settle SEC charges that it failed to establish, maintain, and enforce policies to prevent the misuse of material, nonpublic information obtained from outside consultants about U.S. Treasury 30-year bonds.
“Higher-risk trading and business strategies require higher-order controls,” said Robert Khuzami, director of the SEC’s Division of Enforcement, in a news release. “Despite being on notice from the SEC 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.”