Goldman Sachs has consented to pay $22 million to settle a lawsuit by the U.S. Securities and Exchange Commission (SEC) that the global investment firm lacked adequate internal policies to prevent stock research tips from being improperly forwarded to the firm’s largest clients. The SEC had alleged in its complaint that Goldman showered its biggest clients with preferential treatment in so-called “trading huddles.”
According to the New York Times, Goldman’s research analysts met frequently in “huddles” to strategize about trading tips to be forwarded both to the firm’s traders and to select Goldman clients. Some of the huddle-recommendations, however, differed significantly from the firm’s widely circulated printed reports for everyone else. The SEC alleged that the huddle practice raised “a serious and substantial risk that analysts would share material, nonpublic information concerning their published research” with Goldman’s top clients. In addition, the Times reports, Goldman was deficient in its oversight of the sharing of information from huddle traders to the select chosen clients.
Goldman will pay $22 million, split equally between the SEC and the Financial Industry Regulatory Authority (FINRA), an independent regulator over all securities firms operating in the United States. FINRA seeks to protect investors by ensuring the fairness of the U.S. capital markets.
The idea for the trading huddles was developed after a 2003 $1.4 billion settlement among regulators and several Wall Street firms involving allegations that the firms, including Goldman, had been releasing overly optimistic stock research to garner more rewarding investment banking business. The settlement required the firms to institute firewalls between investment banking and research. In addition, the firms were forced to stop using banking revenue to fund the research side of the business.
Those constraints left Goldman executives searching for different ways to make money from the firm’s stock research. By creating trading huddles, the SEC alleged, Goldman could provide top clients with trading tips that would ultimately generate increased trading commissions. According to the SEC, the huddle program was an influence on the evaluations of research analysts and a potential influence on their compensation. The Goldman huddle-trading-partners would rank the Goldman analysts and provide feedback on analysts that was used in their performance reviews.
The SEC’s investigation of Goldman’s huddle practice followed a 2011 Massachusetts enforcement action that fined the investment firm $10 million.
The SEC has taken a strong stance against securities-related fraud and other irregularities. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) offers incentives, procedures and protections for whistleblowers who come forward with information concerning securities-related fraud to the SEC. Section 922 of Dodd-Frank is similar to the qui tam provisions of the federal False Claims Act in that it provides compensation to individuals whose information results in a successful SEC enforcement action. Whistleblowers may receive a portion of recovered sanctions of $1 million or more.
Waters & Kraus is a national firm with highly skilled lawyers practicing qui tam litigation in four offices, including Dallas, Los Angeles, San Francisco, and Baltimore. Our attorneys have decades of experience successfully representing whistleblowers in a variety of fraud cases. Contact us or call our attorneys at 800.226.9880 to learn more about our practice and how we can assist.