Goldman fined $22M for ‘willfully’ violating law on information-sharing, SEC says

April 12, 2012

Wall Street powerhouse Goldman Sachs “willfully violated” federal law by holding weekly “huddles” through which there was at least the potential for the firm’s analysts to offer Goldman’s own traders and favored clients a preview of the firm’s investment research, the Securities and Exchange Commission said Thursday.

The firm’s practices “created a serious risk” that Goldman and its select clients would have early access to potentially market-moving information, the SEC said.

The agency did not accuse Goldman of insider trading, but it essentially said the firm created an environment in which systematic trading based on advance information could have gone unchecked. In this case, the information was the “buy” or “sell” recommendations and other stock analysis by the firm’s own employees.

Goldman agreed to pay a $22 million penalty to settle the agency’s administrative case and a parallel action by the Financial Industry Regulatory Authority (Finra), an industry self-regulatory group. Goldman also agreed to be censured and to change its policies and procedures, the SEC said.

Goldman settled a related case with the Massachusetts attorney general last year by agreeing to pay a $10 million penalty.

“We are pleased to have resolved this matter,” Goldman spokesman Michael DuVally said of the SEC settlement on Thursday.

The offenses occurred from 2006 to 2011, regulators said. The SEC action focused in part on what Goldman called its “Asymmetric Service Initiative,” in which analysts shared information and trading ideas with select clients, the SEC said. The program was intended to boost commissions from stock trades, the SEC said.

Before November 2006, Goldman required that any significant new statement from its analysts about a stock be distributed to all the firm’s clients, the SEC said, but Goldman later sent mixed signals to its staff members. In a December 2006 training presentation, the firm said stock analysts could share short-term trading ideas with other Goldman employees, even if those ideas involved such things as selling a stock that the firm’s published reports advised investors to buy, according to the SEC. There were hundreds of instances in which an analyst discussed a stock at a huddle and then changed his or her rating of the stock within days, the SEC said.

“Whether or not any information regarding the impending ratings changes was communicated during those huddles, the sheer volume of those instances, had they been adequately identified and investigated by Goldman, should have alerted Goldman to the risk that material, nonpublic information concerning its analysts’ published research could be improperly disclosed and misused,” the SEC said in a charging document.

The SEC found a red flag in the 2007 performance evaluation of one Goldman analyst. In the review, a junior employee commented that the analyst “needs to be more careful with the substance of his conversations with clients as some are aware of upgrades/downgrades ahead of the event,” the agency said.There is no record that the management of Goldman’s investment research division looked into the matter, the SEC said.

The SEC noted that almost a decade ago it accused Goldman Sachs of violating the same legal requirement that it take precautions to prevent the misuse of confidential information. The 2003 case involved information obtained from consultants about U.S. Treasury bonds. Without admitting or denying wrongdoing, Goldman agreed to pay a $5 million fine and give up $4.3 million of allegedly ill-gotten gains.

The latest case is another in a series of blows to Goldman’s reputation.

In 2010, the firm agreed to pay $550 million to settle SEC charges that it misled clients about an investment tied to subprime loans. Goldman did not inform investors that it allowed a major hedge fund, Paulson & Co., to help tailor the complex instrument — essentially stacking the deck against them as it was using the instrument to profit at their expense.

In October, former Goldman Sachs board member Rajat Gupta was charged with insider trading on suspicion of sharing boardroom secrets with hedge fund billionaire Raj Rajaratnam. Gupta is fighting the charges.

Last month, Greg Smith, a Goldman Sachs executive director, published a resignation message in the New York Times denouncing what he called a “decline in the firm’s moral fiber.” Smith said the firm put its profits ahead of its clients’ interests.

“It makes me ill how callously people talk about ripping their clients off,” Smith wrote.

Goldman’s leaders suggested that Smith was “disgruntled” and said his criticism did not reflect the firm’s values or culture.

As recently as February, Goldman received a notice that the SEC staff might seek charges against the firm related to “disclosures contained in the offering documents used in connection with a late 2006 offering of approximately $1.3 billion of subprime residential mortgage-backed securities,” Goldman said in a regulatory filing.

Thursday’s $22 million settlement is small in relation to Goldman’s overall finances. For last year, Goldman reported profits of $4.4 billion on revenue of $28.8 billion.

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