Reuters reported on Tuesday that the Massachusetts Securities Division is considering administrative proceedings against GS for its conduct in weekly meetings of analysts and traders, called “huddles.”
I wrote about the Goldman huddles when the news first broke a little less than two years ago, so you can read more detail in that post. It’s not clear whether the meetings still go on, but when the Wall Street Journal revealed their existence, the huddles were weekly get-togethers of GS’s analysts and proprietary traders. Their purpose was to develop short-term trading ideas involving stocks GS analysts covered.
The issue is how the results, which sometimes ran contrary to the recommendations in GS’s published research, were disseminated. GS apparently used them in its own trading. Institutional salesmen privy to the meetings’ output passed the ideas on to a small number of the firms largest clients. However, GS didn’t inform the rest of its customers, who were left to act on an official “buy” recommendation when favored clients were being told to “sell.”
Massachusetts has long been a leader in sticking up for the rights of ordinary citizens in financial matters, so this is an interesting situation. I don’t think the case is as open and shut, however, as, say, the Raj Rajaratnam insider trading case was. Three reasons:
1. Every GS research report contains several pages of disclosure in small print at the end (I’ve checked). Sometimes the disclosure section is longer than the report. But the fact that GS may act against its official recommendations and tell different things to different clients is among them.
2. According to the WSJ, analysts were “guided” not to utter the words “buy” or “sell” in the meetings. So while circumlocutions may have made it clear what the conclusions arrived at in the meetings might have been, establishing that in court might be hard.
3. GS equity research really isn’t that good, in my opinion. Its strength has always been the collection of large amounts of factual information about companies and industries. Its weakness is analysts’ judgment. And the firm has slipped badly in the annual research department rankings by the Institutional Investor magazine, among others, in recent years. So GIGO might be another defense.
One other note: the Reuters article refers to the recently-issued GS 10Q. Footnote 27 to the financial statements mentions in a general way GS discussions with the Massachusetts regulator. Either the Reuters reporter is incredibly observant, or someone (the regulator?) called her attention to it. Can it be that what we’re seeing are the first steps in a systematic investigation by regulators of Wall Street behavior before and during the financial crisis?