The Financial Industry Regulatory Authority (FINRA) has fined Goldman Sachs $22 million for failing to supervise equity research analyst communications with traders and clients, and for failing to adequately monitor trading in order to detect information breaches by research analysts.
The Securities and Exchange Commission (SEC) announced a related settlement with Goldman. Pursuant to the settlements, Goldman will pay $11 million each to FINRA and the SEC.
In 2006, Goldman established a business process known as “trading huddles” to allow research analysts to meet on a weekly basis to share their best trading ideas with the firm’s traders, who then interfaced with clients. Analysts would discuss specific securities during trading huddles while they were considering changing the published research rating or the conviction list status of the security.
The huddles were expanded in 2007 to a select group of 180 hedge funds and money managers. In exchange for the trading ideas, the SEC alleged, Goldman expected to generate additional commissions from the clients.
“Goldman’s trading huddles created an environment of heightened risk in which material non-public information could be disclosed to its clients,” said Brad Bennett, FINRA executive vice-president and chief of enforcement. “The firm did not have an adequate system in place to monitor client trading in advance of changes in its published research.”
One major problem was that clients were not restricted from participating directly in the trading huddles. They had access to the huddle information through research analysts’ calls to the firm’s high priority clients, calls which included discussions of the analysts’ actionable ideas.
In addition, trading huddles created the risk that analysts would disclose material non-public information, including previews of ratings changes or changes to conviction list status. Goldman failed to implement adequate controls to monitor communications involving the meetings.
Goldman didn’t adequately review discussions to determine whether an equity research analyst may have previewed an upcoming ratings change. In 2008, for example, an analyst stated, “companies with consumer and small business exposure will be under pressure in the current environment.” The next day, the analyst received approval to downgrade one of the companies mentioned from neutral to sell.
Goldman also failed to monitor for possible trading in advance of rating or list changes in employee or proprietary trading. It also failed to investigate sudden trade changes.
Goldman neither admitted nor denied the charges, but consented to the findings of SEC and FINRA. This latest settlement comes only a month prior to the criminal trial of Rajat Gupta, a former Goldman board member accused of passing information from private board meetings.
The SEC noted this isn’t the first time Goldman’s policies proved deficient in protecting against the flow of non-public information. Goldman paid $9.3 million in penalties and disgorgement in 2003 for a lack of proper controls related to U.S. treasury bonds. The firm also faced a $7 million settlement for poor supervision last month, and a barrage of damning allegations from former employees stating the investment bank no longer serves clients’ best interests.