Favoring Select Clients Earns Goldman Sachs a $22 Million Fine

In an April 12, 2012, article for Forbes, Halah Touryalai writes that Goldman Sachs was hit with a $22 million penalty for claims that its analysts shared non-public short-term trading ideas with favored clients.

Touryalai reports that Goldman Sachs agreed to settle the charges that its equity analysts met during weekly “huddles” with the firm’s traders to discuss “material, nonpublic information about upcoming research changes” that would eventually be shared with a select group of top clients. The firm will pay $11 million to the SEC and another $11 million to FINRA in a related proceeding.

The SEC said the firm lacked policies for preventing clients and employees from trading on the non-public information. “Higher-risk trading and business strategies require higher-order controls,” said Robert S. Khuzami, Director of the Commission’s Division of Enforcement. “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.”

This practice was commonplace between at least 2006 and 2011. In fact, the SEC says, Goldman created a program dubbed the Asymmetric Service Initiative (ASI) in which analysts shared information and trading ideas from the huddles with select clients.

Touryalai gives these examples that the SEC cites in its Order:

1. Company A – In April 2009, the Goldman equity research analyst covering Company A discussed the stock during a huddle, even though four days earlier he had recommended the stock to the IRC as a potential addition to Goldman’s Conviction List. The script for the huddle noted that, while investor sentiment was negative on Company A, the analyst covering the stock expected that interest in stocks in that industry would increase before an upcoming industry conference. Five days later, the analyst’s rating on Company A was upgraded from Neutral to Buy, and the stock was added to the Conviction List. There is no record of anyone from Goldman’s compliance group having attended this huddle.
2. Company B – In April 2008, the Goldman equity research analyst covering Company B discussed the stock during a huddle, after he had already drafted a report upgrading Company B from Neutral to Buy. The script for the huddle noted that the analyst looked to turn more positive on his group, and highlighted Company B. Company B was also added to the Financials sector Record of Ideas that day. Within hours after the huddle, the analyst recommended an upgrade of Company B at an internal meeting.Four business days later, Goldman upgraded Company B from Neutral to Buy. The following day, the analyst removed Company B from the Record of Ideas. A representative from Goldman’s compliance group did not attend the huddle.
3. Company C – In July 2008, the analyst covering Company C discussed the stock during a huddle, even though he had already proposed a potential downgrade of the stock and scheduled an IRC meeting to discuss the downgrade. The script for the huddle stated that the analyst expected certain companies to be “under pressure,” including Company C. The next day, the analyst downgraded

The Forbes article states that last June Goldman was hit with similar claims by the state of Massachusetts and agreed to pay a $10 million over the s0-called trading huddles.

Securities Lawyer, Lars K. Soreide, of Soreide Law Group, PLLC, has represented clients nationwide. If you or a family member have sustained investment losses due to your stock broker or financial advisor’s recommendations, call for a free consultation on how to potentially recover your losses. To speak with an attorney call 888-760-6552, or visit our website at: www.securitieslawyer.com.