In 2001 ten investment banks agreed to pay a record $1.4 billion to settle enforcement actions arising from an investigation of research analyst conflicts of interest- in other words: insider trading. The firm settlements were reached with the Commission, NASD Inc. (NASD), the New York Stock Exchange, Inc. (NYSE), the New York Attorney General (NYAG), and other state regulators. The 10 firms were: Bear, Stearns & Co. Inc. (Bear Stearns), Credit Suisse First Boston LLC (CSFB), Goldman, Sachs & Co. (Goldman), Lehman Brothers Inc. (Lehman), J.P. Morgan Securities Inc. (J.P. Morgan), Merrill Lynch, Pierce, Fenner & Smith, Incorporated (Merrill Lynch), Morgan Stanley & Co. Incorporated (Morgan Stanley), Citigroup Global Markets Inc., f/k/a Salomon Smith Barney Inc. (SSB), UBS Warburg LLC (UBS Warburg), and U.S. Bancorp Piper Jaffray Inc. (Piper Jaffray). Even though all of the firms involved paid hundreds of millions in settlements- they did so - without admitting or denying the allegations. Maybe we did something, maybe we didn't- here's a huge stack of money and we promise we wont do it again.
Specifically, Bear Stearns, CSFB, Goldman, Lehman, Merrill Lynch, Piper Jaffray, SSB and UBS Warburg issued research reports that were not based on principles of fair dealing and good faith and did not provide a sound basis for evaluating facts, contained exaggerated or unwarranted claims about the covered companies, and/or contained opinions for which there were no reasonable bases in violation of NYSE Rules 401, 472 and 476(a)(6), NASD Rules 2110 and 2210, as well as state ethics statutes. In other words, they screwed their clients intentionally and knowingly by putting the firms profits ahead of the clients best interest. Again, not to worry, they all agreed under the terms of the firm settlements that, 'an injunction will be entered against each of the firms, enjoining it from violating the statutes and rules that it is alleged to have violated'. Go ahead, its alright, read it again until it makes sense.
To clarify, they ALL did something- maybe or maybe not, they ALL paid a record fine, and ALL agreed that if they had done some things- that they will not do these things again.
In August of this year (2009), examiners at the Financial Industry Regulatory Authority, the industry self-regulatory body known as Finra, and the Securities and Exchange Commission announced they intend to ask Goldman for information regarding their weekly get-togethers-known as 'huddles'. The reason: Internal documents show that at times in these huddles, short-term trading tips differed from Goldman's long-term research. Critics complain that Goldman's distribution of the trading ideas to Goldman traders and major clients hurts other Goldman customers who aren't given the opportunity to trade on the information, and may be relying on the firm's longer-term research to make investment decisions. In addition, the trading tips go first to Goldman traders and then to clients, but Goldman says its traders aren't allowed to act on the tips until they have been relayed to clients. Yup, read it again, the Goldman trading desk gets access before EVERYONE! One regulator said that it might be worth looking at how Goldman polices the handling of this information. Ya think???
Securities laws require firms like Goldman to engage in "fair dealing with customers," and prohibit analysts from issuing opinions that are at odds with their true beliefs about a stock. Steven Strongin, Goldman's stock research chief, says no one gains an unfair advantage from its trading huddles, and that the short-term-trading ideas are not contrary to the longer-term stock forecasts in its written research.
Maybe he missed the meeting last April.
In April 2008, research-department employees at Goldman called about 50 favored clients of the big securities firm with the same tip, including hedge-fund companies Citadel Investment Group and SAC Capital Advisors, the documents indicate. The tip- buy Janus Capital Group. At the time, Goldman analyst Marc Irizarry had a neutral rating issued on Janus-a rating he would eventually raise to bullish almost one week later. When the vast majority of Goldman's clients, received Mr. Irizarry's research six days later- Janus shares had already jumped 5.8% because the 50 favored clients had access to the bullish insights a week earlier in a huddle.
Recently, the Financial Industry Regulatory Authority, the industry's self-regulatory body, proposed new rules meant to clarify existing disclosure obligations under the rule requiring "fair dealing" with all clients. Did they include fines or censures for Goldman? No. Did they enact new rules to assure all Goldman's clients have the same access? No. Did they take steps limit the information flow to Goldman's trading department? No.
What action are they willing to take as the industry's self-regulatory body? According to FINRA, they have proposed and are strongly considering the following:
'Firms could issue contradictory ratings as long as clients were told that such inconsistencies were possible'.
Yup, read it again.