Goldman Pays $22 Million To Settle Charges Related To Research Huddles

4/25/2012

On April 12, 2012, FINRA and the SEC announced that Goldman Sachs & Co. will pay $22 million to settle claims that the firm failed to implement policies to keep its stock analysts from revealing nonpublic information, including upcoming research changes, to select clients. According to FINRA and the SEC, from 2006 to 2011, Goldman established a business process known as “trading huddles” to allow research analysts to meet on a weekly basis to share trading ideas with the firm’s traders and, on occasion, with equity salespersons. During the huddles, analysts discussed securities while the securities’ published research ratings were under review. Analysts were encouraged to present their “most interesting and actionable ideas” to generate profits for the trading desk. In addition, research analysts’ contributions to the huddles were considered in their performance evaluations and could impact their compensation.

According to the SEC, the huddles created a “serious risk” that analysts would share nonpublic information concerning their research with the firm’s traders and select clients. FINRA and the SEC accused Goldman of failing to implement proper supervisory controls regarding the huddles.

“Higher-risk trading and business strategies require higher-order controls,” said Robert S. Khuzami, Director of the Commission’s Division of Enforcement. “Despite being on notice from the SEC about the importance of such controls, Goldman failed to implement policies and procedures that adequately controlled the risk that research analysts could preview upcoming ratings changes with select traders and clients.”

“Firms must understand that they cannot develop new programs and services without evaluating their policies and procedures,” said Antonia Chion, Associate Director in the SEC’s Division of Enforcement.

The settlement indicates that – nine years after ten securities firm paid $1.4 billion to settle claims regarding analysts’ conflicts of interests – regulators may be paying renewed attention to the relationships between research analysts, traders, and favored clients.

For more information, please contact Jared Perez at jperez@wiandlaw.com.