Oh dear. Another week, another negative Goldman Sachs story.
The Wall Street Journal does the honours this time, in the shape of a story by Susanne Craig shedding light on the bank’s more dubious research practices.
According to the article, Goldman sometimes finds itself in the habit of tipping off preferred clients about rating amendments before official publication of research and analyst notes to its wider client base.
Craig even finds an impressive example to justify her claims:
Goldman Sachs Group Inc. research analyst Marc Irizarry’s published rating on mutual-fund manager Janus Capital Group Inc. was a lackluster “neutral” in early April 2008. But at an internal meeting that month, the analyst told dozens of Goldman’s traders the stock was likely to head higher, company documents show.
The next day, 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. Readers of Mr. Irizarry’s research didn’t find out he was bullish until his written report was issued six days later, after Janus shares had jumped 5.8%.
Here’s the time sequence of events:
Hmmm.
Fear not, Goldman Sachs did have an explanation for why these practices were perfectly justifiable. As the bank’s spokesman explained (our emphasis):
Goldman spokesman Edward Canaday says the tips are “market color” and “always consistent with the fundamental analysis” in published research reports. “Analysts are expected to discuss events that may have a near-term or short-term impact on a stock’s price,” he says, even if that is a different direction from an analyst’s overall forecast. Goldman’s published research reports include a disclosure that “salespeople, traders and other professionals” may take positions that are contrary to the opinions expressed in reports. But the firm doesn’t disclose the trading huddles.
The tips usually go to top clients who have expressed interest in having the information and have short-term investment horizons, he says. Goldman doesn’t want to overload other clients with information that isn’t relevant to them, he says. “We are not in the business of serving thousands of retail customers,” he says.
Although we wonder exactly how Goldman goes about determining what ‘other clients’ deem to be relevant information. We also wonder to what degree the ‘trading huddle’ practice might be going on in other asset classes too, at least judging from time sequences like these.
Related links:
Goldman’s visionary WTI performance - FT Alphaville
Goldman’s Trading Tips Reward Its Biggest Clients - WSJ
